The rebound of the stock market early this week was reassuring, and it underscores the fundamental positivism of Americans and their faith in the future.
In the past several weeks, the national broadcast media has been catastrophizing over the economy, all but predicting an economic collapse.
Many observers were forecasting a lengthy economic depression, if not worse. The economic situation was made worse by the broadcast media seeking out and airing the most sensational comments and opinions.
With television devoting too much attention to the doom-and-gloom reports, people were prompted to take money out of banks and dump stocks of viable, strong companies, and the economic dominoes began to fall.
Now, despite a soaring stock market rebound early this past week - and glowing, sensationalized media predictions of a robust rebound, fundamental problems still need to be addressed. One of the major ones is the highly leveraged, packaged mortgage instruments including Collateralized Debt Obligations. These risky contracts, sold back and forth between institutions as "investments." were too complex for even financial professionals to truly comprehend their extreme risk.
Then when mortgage defaults began to rise slightly last year, these contracts soured at an exponential rate. When mortgage defaults had risen by a few percentage points, the CDOs and other packaged investments dropped fast to one-fifth or one-tenth their face value.
And many companies held onto these CDOs, without informing the stockholders or the public, expecting their returns to reverse.
Many investors were caught unaware that their trusted brokerage firm, bank or savings and loan institution was investing in these toxic products.
Stockholders of Sovereign Bank, Goldman Sachs, E*Trade, Lehman Brothers, Morgan Stanley and other firms were burned when stock prices imploded - yet their firms' annual reports offered no indication of such risky ventures.
Many ordinary, responsible citizens have had their retirement savings evaporate in several short weeks, although they believed they were investing prudently.
Not only were the investors caught unaware. Many executives and board members of these firms and others didn't understand how highly-leveraged and risky the contracts were.
Regulations need to be put into place to fully and accurately inform investors, and the public, of the risks.
Although much of governmental market regulation hampers productivity and siphons off potential profits, there's no doubt that the public must be aware of the financial risks associated with these and other similar hidden investments that many firms still hold. Thank goodness our local banks apparently didn't invest in these murky, risky investments.
Unfortunately, it looks like the Wall Street executives that devised these catastrophic contracts will be able to go about their lives without much change in their lifestyle, while the rest of us will be paying for the financial bailout for decades to come through taxes or defunct investments, and may have to radically change retirement plans.
Also, in the past seven years or so, a lot of people with a limited budget were trying to get into ritzy, cavernous homes in suburbs around the nation.
Now, unfortunately, all of us will in essence be underwriting the foolish home purchases as their homes will be protected from foreclosure by the government, and according to one of the bailout plans, we'll all likely be paying off a portion of their mortgages on their Hollywood-ish homes through our taxes.