19 Sep 2008

The Government Is Not Promoting Financial Stability

All Posts No Comments

The stock market is opening way way up today because of the announcement of massive government efforts to “support” financial shares. This just demonstrates that the government interventions have not been promoting “stability.”

Imagine that during normal economic times, the government started handing out hundreds of billions of dollars to various firms every few days, but that there wasn’t a discernible pattern. (I’m referring to the decision to let Lehman fail but not Bear, Fannie & Freddie, or AIG.) Moreover, investors learned that if a firm became troubled, the government might literally seize it and end up robbing the equity from common shareholders.

OK, so again, suppose we were in a normal economy and a delusional Treasury secretary started doing the above. Wouldn’t every “conservative” financial analyst decry how destabilizing these actions would be? Well, those actions are still just as destabilizing, but now we are treated to them during the midst of a financial crisis. I.e. it’s during periods of economic vulnerability that the government unleashes measures that would obviously be harmful even during times of strength.

Last observation: I have been saying for months that the government’s steadily increasing rescue attempts were prolonging the crisis, because investment banks and others with assets tied to suspect mortgages were postponing their adjustment, hoping the government would finally provide a massive bailout. And that’s exactly what happened. So those institutions performed “rationally” by trickling out the bad news and stringing their shareholders along for over a year, rather than giving a very candid disclosure 12 months ago, taking their losses, and getting on with a recovery.

Comments are closed.