My Two Cents - "Capitalism: DOA"

09/19/2008

“Out of Control?”

Political leaders were told last night by Paulson and Fed Chairman Bernanke that if something weren’t done, the entire US financial system was going to melt down in the next week. Maybe this is true, maybe it isn’t, but whatever the case, they’ve got the full cooperation of politicians to do whatever they want. Congress will sign anything right now as long as they can get out of town for their next vacation, and I fully expect Paulson to receive a carte blanche very quickly to do whatever he sees fit. Am I the only one who sees a problem with this? It was very clear from the news conference last night that Paulson is in charge. Not the President, not the Congress, but a banker. And not just any banker. This is the guy who used to be in charge of Wall Street’s biggest firm. This is the man who sold his holdings in Goldman Sachs on June 30, 2006 for almost half a billion dollars. Is it really out of place to consider the conflict of interest here? I think not. It would appear as though control over this entire situation has been ceded to Mr. Paulson, and to a lesser extent, Fed Chairman Ben Bernanke. Bernanke, however, is about as effective as Congress. He’s an academic, and has absolutely no idea how to fix this mess. That is apparent.

What is even more ironic is the sudden departure from the stance that taxpayer dollars not be used to conduct further bailouts. After the Fannie/Freddie mess we were assured that officials were very much against using taxpayer money for further actions. Yet less than two weeks later, we are now being told that hundreds of billions of taxpayer money will now be needed to fix the crisis.  I cannot honestly believe that Paulson would have said what he said 10 days ago if he knew he was going to have to retract it that quickly. This indicates that they have no idea what is going on. They are not proactive; they are reactive. This time they want it all. Full authority to buy all bad debt. They want this to be the last one. The biggest, best, and final bailout. The complete nationalization of the banking and financial system here in the US. I wonder if they plan on using taxpayer money to make good on all the bad debt that was sold overseas? Paulson’s estimate on the amount needed is off by at least a magnitude of 10. He knows he cannot go into a press conference and pledge trillions in taxpayer money to this problem. The Dollar sold off as it was – almost before the words were out of his mouth.

“The Chosen 799”

Around the same time, SEC Chairman Christopher Cox penned an emergency order banning the short sale of no less than 799 financial companies. Miss any Mr. Cox? This was done to ‘maintain market integrity’. Integrity? For anyone who was watching this morning, the results of this order have been dramatic. Obviously, short ETF’s and mutual funds make money for their holders by shorting stocks. Inverse ETF’s that track financial indexes make money for their holders by shorting financial stocks. So what happens is the poor guy that thought he’d try to protect his portfolio or actually make a few bucks by picking up one of these funds has gotten crushed this morning. Even the short funds that don’t necessarily focus on financial firms have had a bumpy ride.

Actually deciding to enforce the existing rule on naked short selling was the right thing to do. Nevermind the fact that this should have been going on all along. Clearly, naked short selling was ok as long as it was confined to operations deemed to be inconsequential by the financial elite. However, the action to place a curb on genuine short-selling is another matter entirely. To remove an important market function with absolutely no notice is draconian, and reeks of overt fascism. It says we no longer have a free market. It says that it is ok to put our hard-earned money in the markets as long as we do it in a manner which is pleasing to the financial aristocracy. The take home message here is that if they don’t like the rules, they’ll just change them. This mentality has become more and more obvious over the past seven or so weeks. It leaves those out-of-the-know wondering what rule will be changed next. It must be nice if you are privy to these things as I’m sure there are many that are, but for the majority of folks it adds another layer to an already complex puzzle.

A good dose of spin

The two day rally in the markets has already been called the triumph over the credit and banking crisis. Indeed the mood of Wall Street has changed from pure despair to pure euphoria in the span of 24 hours. Lost in all of this are the reasons for the euphoria. We’re losing our free markets and there is cheering. US taxpayers will pay for this mother of all bailouts for decades, maybe longer, and there is cheering and euphoria. The irresponsible actions of the very upper crust of the financial structure are once again being rewarded, and payment comes from the sweat of the common man’s brow. This is cheered, and there is euphoria.

In short, this has been a tragic week for capitalism and the free market in the United States. The idea that we’ll have capitalism when things go well and socialism when things go poorly is reprehensible. The US government and media has lambasted foreigners when they nationalize companies, natural resources, or infrastructure. Yet our government will do it on an even grander scale and the media looks the other way. There needs to be outrage, not cheerleading. There needs to be accountability, not bailouts. The system needs to be allowed to purge, not to continue the binge. Perhaps Sherwood Boehlert, a former Congressman from New York put it best when he said: ‘This is something you can't go on forever without addressing, but Congress in a short span of time is best served by going home.' For once I couldn’t agree more.

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Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.