3 Things 11-29

11/29/2021 Although MAS is a financial services company, not everything published herein will be about numbers or investing. But no matter the topic, we hope for three things: 1) That you find the time you spend engaged worthwhile. 2) That you’ll reach out to us for help in any of our areas of expertise if something we discuss creates an urging in you to do so. 3) That you’ll share this with somebody new each time you read it. Thing One What Caused The 2008 Financial Crisis? Well, it started with a government official saying something like this: "There is a widespread lack of affordable housing and access to credit, especially in communities of color...It is FHFA’s duty through our regulated entities to ensure that all Americans have equal access to safe, decent, and affordable housing..." The policy impact of that statement was that the government loosened its mortgage underwriting standards. What happened next was pretty succinctly explained by Peter Wallison in a recent Wall Street Journal article: “...But the government’s lower underwriting standards drive down standards for private lenders, too. Banks and other mortgage lenders—if they want to stay in the business—have to offer their mortgages on similar terms. People who don't own homes then dive into the market to take advantage of the low down payments, and housing prices rise even faster. This encourages cash-out mortgages, in which homeowners reduce the equity in their homes, sometimes to buy a boat. The process goes on for years until prices are so high that sales growth falls and homeowners can’t sell their homes to pay off their mortgages. Housing prices then collapse, mortgages go unpaid. Banks, other lenders, and even Fannie and Freddie incur losses and another financial crisis begins...” We all know what happened as a result of the 2008 financial crisis. The stock market crashed, people lost homes and retirement savings, and the government blamed it all on the banks for acting greedy and being predatory by selling loans to people who couldn’t afford them - even though they encouraged the behavior by relaxing the standards, remember? That’s the history refresher. Here’s the problem: The quote at the beginning of this note about the lack of affordable housing was made again last week by the new acting director of the FHFA. Things are different now than they were in 2008 so history may not repeat itself, but it might at least rhyme, as the old saying goes.

Thing Two Thanksgiving Has Passed But The Turkeys Are Still Around “Wondering why your Thanksgiving groceries cost more this year? It’s because greedy corporations are charging Americans extra just to keep their stock prices high. This is outrageous.” That was a statement made by a sitting US senator last week. None of us can actually know what someone else thinks, but that statement suggests the senator thinks we’re just plain dumb. Prices go up when the level of demand supports them - whether that’s the price of a share of stock or a loaf of bread. To make CEOs out to be villains for wanting to maximize profits, legally, is silly. Boards of directors hire CEOs for that sole purpose. That much has been obvious to even the casual observer for a long time. What might not be so obvious at first but very simple to understand is that profit maximization is good for society. Long ago, someone said, "profits are the cost of staying in business". If a company can't make a profit, in other words, it will eventually be forced out of business. No advanced level of education or political enlightenment is needed to understand that. And if that company goes out of business, society will have one less producer to help keep prices for goods and services stable or even falling (good for society) and one less employer to help keep prices for labor from falling (bad for society). And as far as the CEOs wanting to keep their stock prices high, it’s widely known that a company's stock price tends to follow its earnings (profits), or at least its earnings prospects, over time. There is nothing inherently insidious about a CEO running his business in a manner that, legally, maximizes the company's profits, even if the CEO gains financially from that. Suggesting that it’s us against them (the supposedly greedy CEOs) is the real evil because it sets up to act against what should be our own interests. We can't all be CEOs. But we should all be owners of stock so we can benefit, right alongside the CEOs, from the share price increases that result from all their efforts at maximizing profits. Those of us with 401ks, IRAs, and the like have seen the results and understand the benefits of stock ownership. We should tell our friends not to fall for the con that demonizes CEOs and “Wall Street”. We need them to keep doing what they do way more than we need protection from them. So, back to the divisive comment from the Senator, yes, eating turkey was more expensive this year. We all know that by now. It turns out though that listening to turkeys might be the root cause.

Thing Three Just A Thought “Beware of false knowledge; it is more dangerous than ignorance.” – George Bernard Shaw