Reset

Steve Ballmer, the Microsoft CEO who almost never has anything interesting or that makes much sense to say, broke the barrier of irrelatively this weekend. In an interview with "Fortune" magazine's web site, he made the distinction between the economy "rebounding" and "re-setting". It's an important distinction.

The crash started last year and accelerated in the first quarter of this year. All the markets hit rock bottom on March 9, taking 40% of the value of our collective investments with them and dragging once-powerful companies down in the undertow.

Lehman Brothers collapsed under the pressure. GM and Chrysler went begging to the Congress. Merrill Lynch had a shotgun wedding with Bank of America. One unit of AIG brought them to the brink of global failure.

Since then, GM and Chrysler have both declared bankruptcy and are depending on government money both to operate and to drive customers to their dealer outlets. Bank of America alleges that it was coerced into acquiring Merrill Lynch, even though their website displays both names. And AIG is quietly liquidating its portfolio of companies (including the one that manages my retirement account, for disclosure purposes).

These companies shared a culture that rewarded speculation and not actual real-money profits. GM and Chrysler kept churning out cars that people increasingly could not afford to buy or operate. The price of gas skyrocketing didn't stop them from pushing tricked-out SUV's that got 15 miles a gallon. And they gave their executives huge bonuses for doing so.

Merrill Lynch failed, but before the wedding with the shotgun, it paid out executive bonuses that defy imagination for a company that is going under. AIG did the same thing.

I have to shake my head and think "what were they thinking?"

Before they crumbled under the weight of reality, they were reporting profits based on unrealized gains. What people thought their assets were worth until they found out the truth.

Cascading mortgage defaults were the precursor of cascading credit defaults, country-wide in all industries. Credit that had been too easily available to anyone suddenly dried up for almost everyone.

The Dow has gone from over $13,000 to $9,171 today. It's under-valued as a rule, but it won't see $13,000 for a while. Expectations have changed. Companies have to earn real money to see their stock price go up. They have to reset their values to account for the bad debt they've taken on.

I have accepted that I’ve lost at least 15% of my IRA portfolio, after it reset at a more realistic valuation. From a 40% loss, I’ve gained 25% back. Anything more will be slow coming.

The markets and the economy in general is in the process of resetting to a more realistic standard. One that doesn’t record income from highly risky loans and investments that on the broader scale undermine the entire system. And I accept that. I don’t like it, but I accept it.

While critics of the infusion of government cash into the system via multiple bail-outs and subsidies of the private sector rant and rail about principles, those very bail-outs and subsidies have averted a depression that was potentially bigger than the one Roosevelt tried to fix.

The Great Depression is called that not because it was great for the people affected, but because of how it affected them. The destruction of the economic system that the Hoover administration refused to address on principle hit almost everyone in the country. They lost their homes, their farms, their ability to provide for their families.

The latter is the most debilitating blow a man can take. It makes a Great Depression a greater depression on a personal level.

We have avoided that outcome, to date. We’re not out of the woods, by any estimation. But the concept of resetting expectations makes more sense than anything else I’ve heard. And I’ve heard a lot.

We cannot and should not expect or wish for a market that is over-valued because of risky loans and questionable financial products. We should instead seek a market that is driven by real money profits and not speculation on credit-default swaps.

Lehman's is history. Bank of America doth, I think, protest too much. GM and Chrysler limp along, trying to sell their existing inventory even while closing or preparing to close factories right and left. No one even talks about AIG anymore. They've gone from being the largest insurance conglomerate in the world to being largely irrelevant.

We’ve made our bed, and slept in it. Now we must try get the sheets untangled from the pillows and the comforter.

We must reset. Call it collective rehab, but we have to adapt to a more realistic world.