"This is the way the world ends. Not in a bang but a whimper." T.S. Elliott.
Why am I drawn to this poetic line when thinking about our current financial crisis? Actually this is a crisis of conscious more than anything else. Perhaps I am lamenting the end of capitalism by a thousand cuts. The parsing up of risk and reward and arbitrary and corrupt redistribution of financial wealth we are seeing today.
Sure, people say this is necessary in order to save our economy that we bail out too big to fail corporations like Fannie Mae and Freddie Mac. Then of course by the same measure bail out too big to fail banks. Then bail out too big to fail derivatives/Insurance companies like AIG. And yet, by doing so we loose ourselves and our moral compass. It is no wonder that we find ourselves allowing the unconscionable to occur afterwards. We force big banks to eat one another to become even bigger while failing to prevent the greediest and worst culprit Citibank from shrinking. Likewise, we embrace Fannie Mae and Freddie Mac and ask them to do exactly what got them to go under in the first place, sell mortgages at artificially low rates to people who maybe shouldn’t buy a house. And what happens, they start gobbling up marketshare with even greater added risk to the taxpayer even though the Treasury said they wanted to see them get smaller not larger to lower endemic risk.
If this is a free market system then our founding father was Stalin. If you believe you can fairly compete with Fannie Mae and Freddie Mac think again. Forget about a fair, solvent, and balanced local bank ever competing with the mega banks/brokerages. After all, they can eat risk like it was bon bons and shovel it all onto the taxpayers platinum card.
You might wonder why I leave out GM and the auto industry in my tirade against a broken system. I leave it out only because this is still playing out. First, the government prevented the market system to work by preventing bankruptcy. However it has found that this is not enough affront to the tried and true economic system we have in place. They have now stooped to new lows by what they are doing with Chrysler and GM. The fact is, letting Chrysler and GM go under is worse than the following outrages to a free market system.
Why do I say this? Because the government is trying to corral holders of equity into a system of their own devising and break contract law that is the basic underpinning basic fundamental rights that protect everyone's capital and owner’s equity. I'd much rather see a bailout than see the government say to you that you have no rights to claim assets on a company that you funded when it is written in law that you do. Furthermore, to deny people equity when they are entitled it is scandalous. The not so proud owners of Chrysler should actually be the bondholders.
And so the slow train to destruction marches on. As the economy deteriorates, so does our moral and legal system that we cherish. Today the treasury is extending TARP funds to too big to fail insurers including Hartford, Prudential, Lincoln National, Principal, Ameriprise, and Allstate. What too big to fail segment will it be tomorrow: homebuilders, shipbuilders, medical companies, computer companies? We lambast Venezuela and yet we seem to be emulating them.
If indeed we see green shoots why are the government’s insidious hands plowing even further into the fertile ground of free enterprise?
Although I invest in equities and enjoy a rally as much as others, I’ll gladly forgo gains, even suck up some losses, in order to insure that the market is fundamentally strong and the rules of the game are on the up and up. This is not the case today. I have never seen a more crooked market than this.
Although the market has rallied on an infusion of questionable money, mostly from a recent fleeing of government bond’s as interest rates rise, I still look at the economy as eroding precisely because the fundamentals of our economic structure are still being eroded. Doesn’t everyone see that the fair, impartial and organized free market structure is slowly being replaced by a rigid, government dependent one addicted to free money with the expectation of subsidized risk.
Even China is growing leery of the US government’s actions.
There is little room for small businesses and innovation if you fill the economy with state run subsidized mega companies. If you prevent financial companies that aren’t solvent from going under you prevent their depositors from depositing their money into good banks that loan to profitable and stable companies and individuals. Our economic future is getting dimmer not just because of the decrease in the money multiplier. It is dimming because of structural erosion created by government intervention. The US can bounce back from a downturn. It can’t bounce back from a fatal blow to a market economy.
Unless we recognize the rogue cancer that is permeating our system, then the US is destined to slowly get weaker. Jobs will evaporate the economy will keep slumping every time the government doesn’t intervene. We find ourselves in a managed economy cloaked in the guise of a market economy. The world might not end but we will be whimpering fools unable to control our own economic destiny anymore.
Fear not the depression, fear the destruction of the market based economy.
TARP, PPIP, and all incarnations thereof need to be revoked along with the Fed’s ability to secretly absolve their closest friends of all risk associated with lending. Congress needs to monitor the Fed’s ability to manipulate interest rates. So far they have plunged the US from one crisis to another using this instrument to wreak economic disaster time and time again. Banks, insurers, and brokerages probably should be broken up from one another not married together.
Government should not commit any funds to any private institution until they declare bankruptcy. They should only care about the fundamental need to preserve a functioning business for the economy’s sake, not to look after management, appease illegitimate vested interests, nor keep derivatives contracts or their nature under cloak and dagger.
If banks feel government funding comes with too many quid pro quos think again. Getting government funds should be a mark of absolute shame. It should come only with bankruptcy and be painful. There should be no reward and no incentive to get it. None, whatsoever.
Off balance sheet accounting should be abolished. It is an affront to the eyes of shareholders who have the full right to see and know what assets they possess. Likewise all shareholders have the right to know a financial institutions derivatives position. Shareholder’s rights are being restricted because the government doesn’t legitimately view the shareholder as the true owners of the bank and views such things as a national secrecy. This is absurd as it is preposterous. Management does not own a bank as perhaps the Fed would like to think since it is part of the millionaire’s club. They are only the caretakers.
I suppose I am getting a bit long winded here. I mainly am writing this article in hopes I don’t see announcements next year that the government is going to start bailing out a whole new slew of industries because frankly it makes me sick to my stomach.
If the government wants to make a difference, invest in infrastructure and education: preferably mandatory classes on democracy, economics, and history that the Fed and Treasury can take, because God knows, they need it. Maybe then they will quit undermining the economic system they are suppose to protect.
The fact of the matter is, for too long has the Fed and Treasury been interested in making friends rather than upholding the tenants of a free and fair market economy. It shows! The world in which you could invest in a free and fair market is ending and yet, seldom do I even hear anyone scream. T.S. Elliott's assesment about the death of things seems to be as pertinent as ...
I don’t own any bank stock, insurance companies, or brokerage like bank holding companies nor short them. Rather I hold real companies making honest money like CAT,SYT, IXYS, and XIDE. Buy them at your own risk and only if they fit your investment needs.