It was a time marked by greed, ignorance, and giddy euphoria. And before it was over people lost their jobs, forfeited much of their life savings, and confidence in their most revered institutions wilted. These words could have been written about the Tulip Mania in Holland in the 1600s; the Depression; or the tech-driven stock market bubble of the late 1990s. In this Commentary, the time is 2008; the time of the housing bust. "The overheated housing market was the genesis of current financial turbulence" (Eric Rosengren, President of The Federal Reserve Bank of Boston). As much as we want to blame banks, the government, and mortgage lenders ... in large part the enemy has been ourselves.

In a world where the tried and true methods of "getting ahead" and staying there are just not good enough, many sought the quick road to the American Dream, choosing the fast lane to riches and self esteem. With unsustainable 15%+ year-over-year housing appreciation ... which could never have lasted ... people who should never have owned a home lined up to get suckered, and middle class Americans thought they couldn't miss flipping properties like pocket tycoons. It didn't last. We knew it wouldn't (we wrote about this in 2003 and 2005), and now we are restless in the midst of a national nightmare.

Our propensity to join the herd in the search for a housing "fix" was exacerbated by what were sometimes sleazy and slick practices by our financial institutions. In this mad grasp for the American Dream there were plenty of obliging "professionals" happy to make it "happen." We bought more than we needed, riding a housing roller coaster we thought would never take a dip ... and still others, who had no business owning a home yet, were placed in risky loans without any evidence they could pay them back. What were we thinking!? Perhaps you were not one of these but we all know many who were.

And now, it's over. We are paying the price. Yet, the government is trying to make it all right, to save us from ourselves. Like many of you, we've been unwilling to accept the possibility that –by "bailing us out"- the government would be rewarding the greed and risky behaviors that brought us to this point. This is "moral hazard" ... by sheltering us from the worst; the government actually encourages this behavior in the future. Perhaps people and institutions should simply be left to just take it on the chin, learn hard lessons ... and never let it happen again.

So, why is the government trying to let people off the hook? Because the alternative -doing nothing- might well be worse. You see, this housing trauma has affected financial markets throughout the world, and every one of you has probably been adversely affected in the last 5 months. At the heart of the issue has been the willingness of major financial players to organize and sell mortgages as if they were "securities". This looked like a wonderful strategy when the heights of the housing boom had yet to be crested. Subprime (higher risk) loans were bundled up with higher quality loans, and sold. It was felt that most subprime loans had minimal risk of default (using historical precedent). Even that minimal risk was mitigated by higher fees and interest rates. Investors in these "securities" were thought to be protected from losses. Called Collateralized Debt Obligations (CDOs) and Mortgage Backed Securities (MBSs), they were sold globally.

Major financial institutions (Bear Stearns as an example) bought billions and billions of dollars worth. But what happened to these packages of mortgages when the housing markets cooled off and began to deflate? Some borrowers now saw their homes worth far less than their mortgage. Others, who bought their first homes under lax underwriting policies, found they really couldn't handle the payments. The delinquency rates and foreclosure rates began to climb to record levels.

These CDOs and MBSs, sold as safe, solid investments were under heavy pressure. How could you place a value on such things, when the houses that backed them were falling in value daily? No one could value them, and the market for them had dried up. They were so pervasive in the marketplace (among the BIG players) that it threatened to freeze the credit markets. Bear Stearns, holding the bag on billions of dollars worth of these (the value falling by as much as 80%) was nearly out of business. If Bear Stearns dropped, The Fed reasoned that more might follow ... so a last minute deal was brokered in the wee hours of the morning. J.P. Morgan would buy them cheap, and the Fed would back the deal. If these risky assets don't pan out, we taxpayers lose ... if they pay off, the Fed can make some money. It's a highly complicated deal, and we can't cover it here as well as we would like. Call it a bailout, if you like, but we've done similar things before with Chrysler, savings and loans, and Long Term Capital Management in 1998.

By bailing out the big guys, the Fed and the government believe they are saving the rest of us, too. So interconnected is our financial industry, that this is likely true.

For the individual home owner who is "underwater" paying on a mortgage that is far more than their home is worth now; or who can't pay a mortgage that is 50% of their take home pay ... the President and Congress are working on a variety of plans to ease the pain. Most ask the mortgage industry (the lenders) to work with the borrowers to avoid foreclosure at all costs. One plan that may have some merit, involves the lender lowering the mortgage amount to the current market price and thereby lowering the payment ... and the lender would receive a share of any future home appreciation when the borrower sells that home. But there are lots of plans. Something will be done.

There are a couple of curious things about all this, though. We wonder, why should so many people not pay their mortgage, simply because the value of the home dropped? They didn't lose their job, they can still pay. They pay on an automobile that loses value as soon as they drive it off the lot, so why not a home that has temporarily lost value? What we see is a moral hazard that the government is explicitly worried about: people still trying to work the system even in the midst of this mess ... and who can easily manage their mortgage payments but will purposely pay late so that it will appear they are having troubles and will thus get a deal from the lender. What does this say about our culture?

The damage done to our financial institutions has been the result not so much of people actually not paying their mortgage payments (although delinquencies and foreclosures have increased), but rather the damage has been due to the fear of the possibility that they will not pay. Once again, the anticipation of a crisis (rampant foreclosures) has actually caused a crisis (the devaluation of the CDOs and MBSs).

We are at a point where the government and The Fed are playing parent to our child. Many of us have been blind and greedy, and many of our institutions have been too willing to take shortcuts to profits which defied rationality. There is just too much at risk for the parent to allow the child to work out their own answers. Some will end up beating the system, but most of us will survive, eventually thrive, and hopefully will be a little wiser ... until the next time.

Craig Pulliam andMichael Comstock are CERTIFIED FINANCIAL PLANNER ™ professionals practicing at 112 Westwood Place, Suite 310 in Brentwood, TN. They own Premier Asset Management and are registered representatives and investment adviser representatives with/and offer securities and advisory services through Commonwealth Financial Network:

 A Registered Investment Adviser, Member FINRA www.finra.org, SIPC www.sipc.org.

They can be reached at 615-777-2125.

Back issues of our Commentary may be found at www.premiercares.us

This communication is strictly intended for individuals residing in the states of

AL,AZ,CA,FL,GA,KY,MI,MN,NC,NH,NJ,NY,TN,WI.

No offers may be made or accepted from any resident outside these states due to

various state regulations and registration requirements regarding investment