With the federal government bailing out businesses left and right, it seems appropriate that the ramifications of such market interference be discussed. While such stop-gap measures are initially greeted with relief by the public, it will not take long for the reality to sink in. As with most other "shortcuts", the current trend of governmental take overs of publicly traded companies are no more than band-aids. They look good in the wrapper, but solve none of the underlying problems.
The definition of insanity
Insanity has been defined as the act of doing the same thing over and over,expecting a different result. We now have an AIG bailout, in the form of federal ownership of 80% in exchange for 85 billion taxpayer dollars. Taxpayer dollars that the fed doesnt have,I might add. The government currently has a hefty deficit, hence, no spare 85 billion in change lying around to buy stock with. The printing presses at the federal reserve are working overtime to pay for this latest poorly advised move.
Lets look at AIG for a minute. They chose to participate in risky investments, no-one forced the insurance company to become an investor in high risk vehicles. That decision was made by the board. Real estate, CDO's, investment banking have been on a downhill slide for nearly two years. They didnt see the problem and take action to protect their stockholders by paring down their exposure? Why not? A prudent investor or trader keeps up with the trends occuring in his portfolio and adjusts as needed. There is absolutely nothing wrong with exiting a bad trade and waiting out a downturn. Believe or not, cash is also an asset. Just ask Warren Buffet, he sits on tons of it just waiting for his opportunity to knock.
AIG's problems are symptomatic of an industry that has been coddled by infusions of tax dollars "for the greater good" of the economy. Is it in the patients interest to have a placebo when the need for surgery is readily apparent? What good can come of throwing money at the result of bad decisions when the root problem is not addressed first?
A Trend Toward Nationalism
For whatever reason, the federal government has chosen to nationalize the financial sector of the American economy. Wether the intention is to stave off economic turmoil or to simply grab more power by controling the financial system, the end result is the same. Governmental ownership and control of a public sector industry. When Bear Stearns was bailed out, with taxpayer money, did it stem the downturn in the financial sector? Certainly not, as is evidenced by the next series of ever larger handouts to companiees whose own mistakes put them at risk.
Fannie and Freddie, government mandated public companies, are now wholly controled by the same people that gave us the public indoctrination, errr, public school system that does ssuuucchhh a grand job. It cant teach little Johnny to read by tenth grade, but we should trust these people to manage even more of our financial life? Need I remind you that the fed cant even balance its own checkbook?
Having a major portion of the financial sector in goverment hands is fraught with risk to the long term stability of our economic system. In fact, it is, to all intents and purposes, a re-writing of our economic system. A free market runs on freedom. Freedom to succeed, freedom to fail, freedom to change with the tides of social and industrial growth. That freedom is based on one single overeaching tenet. The freedom from goverment control.
The Slippery Slope of Economic Socialism
By taking over the financial sector instead of allowing the free market to fix the underlying problems, the federal governmet has begun the path towards economic socialism. Under the guise of creating market stability in one sector, it has set the precedent and the expectation, that could spill over into other market sectors. There are already some politicos that espouse a governmental takeover of the energy sector. Mostly based on national security with overtones of helping out the people with a stabilised pricing system through government control. Having now set the standard for federal intervention, does anyone really expect that the next spike in global oil prices wont be met with even more strenous efforts to nationalize the industry "for the good of the people and the stability of the market?
Further, what happens if the financial sectors meltdown stops and equity valuations return to a substantial price per share? Having taken over the industry, the feds now have a lions share of ownership and pre-emminence on assets. The 80% stake in AIG translates into an 80% dilution of the companies shares. So, with now 80% more shares in the market than before the takeover, existing stockholders take it on the chin, again. As with Fannie and Freddie, those that funded the companies by buying stock have again been shafted by creeping socialism in our economy.
A more interesting question, at least from my viewpoint, is what happens if the meltdown stops and share prices begin to increase? Is the government going to give up the "obscene profits" from such an occurence? I just can not see them giving up a new source of funding.
Lipstick on a Pig
Regardless of the platitudes being regugitated all over the news channels, this is a blatant move to dismantle our free market system. While doing little to repair the actual problem of rampant stupidity in the board rooms, these massive takeovers of free market cornerstones put the American taxpayer further in debt. As of this writing, the feds have printed over $900,000,000,000.00 that they didnt have, to finance the nationalism of a $1,000,000,000,000.00(trillion) a year business sector.
Out of all that "free" money we taxpayers have put into the system this year, how has the sector continued its slide at such an ever more rapid pace? Nine hundred billion dollars added to the deficit in less than a year with no tangible effect on the market other than to socialize a large sector and fail to fix any of the problems that precipitated the slide downward in the first place. That such interference is even contemplated, much less acted upon, should be disturbing to anyone that thinks about it. Consider: The bailout of Bear Stearns: the market keeps sliding.
The takeover of IndieMac: the market keeps sliding.
The takeover of AIG and subsequent guaranteeing(paying for) the takeover of Lehaman by a foreign company. And the market keeps sliding.
I watched a government talking head on the news earlier. She was in a box on one side with the ticker running in a box on the other. Every time she spewed the talking points on how the AIG takeover was such a good thing...... The ticker dropped two more points. Every time she opened her mouth. Hilarious.
I am glad to see that I am not the only one that see's this nationalization as not good. Not good at all.
Insanity has been defined as the act of doing the same thing over and over,expecting a different result.
