Greetings from Prophet North – – – my comfortable abode in North Lake Tahoe where recent storms have left the trees thickly covered with snow.
Imagine for a moment it is April 2000, and the NASDAQ had just started its plunge. It was clear things were bad, and investors were happy that their $100 per share stocks were now $70 per share. And let's further assume the government – for whatever reason – wanted to protect people from suffering the penalties of their bad decisions and introduced the Security Stabilization Act of 2000.
The act, let us suppose, guaranteed that the US Government would purchase any common stock from any U.S. Citizen for 50% of its high price from March 2000. This offer would be valid until the end of 2000 and was introduced in order to provide confidence to a very nervous market.
What would have happened? The market would have fallen, more or less like it did in real life, and individual stocks would suddenly stop falling at around the 50% mark. Immediately after the end of 2000, most stocks would have resumed their plunge. The government's money would have stalled – – but not prevented – – the eventual outcome.
This would have been silly, naturally. What happened instead was that the market fell and fell and fell and eventually stabilized. The loser stocks (like CMGI) whithered away and died, as they should have. And the ones that truly had good businesses (like GOOG and AMZN) represented fantastic buying opportunities for those savvy enough to recognize them. The market cleaned things out, and everyone was better for it in the end.
This thought occurred for a couple of very similar reasons. First, a thoughtful reader sent me a link to the web site AngryRenter.com, whose basic premise is that the artificial floor being created by the government under real estate prices is making it unattractive for people who would love to buy a home (at the true market price). The very next day, a good friend of mine…..who has a no shortgage of money…….also lamented how he and his wife would love to buy a nice house, but they knew that prices were not being allowed to reach their true price.
See how perverse this is? There are people with spotless credit and plenty of money who want to buy houses, but they are economically rational enough to delay doing so simply because of the distortion to "helpful" government is provided. I need to get the kids to bed, but I wanted to get this quick post off (and the thought off my chest).
