Quote:
Originally Posted by charlietwo
nmap- In your opinion, do you see any long-term negative affects as a result of the buyout? It seems to me that the unprecedented powers given to the likes of Paulson and Bernanke have the potential to be extremely harmful to the integrity of our nations institutions.
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Yes, Sir, there are a variety of problems we will create with the bailout. Fundamentally, the federal government will acquire control of the banking and finance industry as well as a great many mortgage loans. AIG is an example; the Federal government will have almost 80% of the stock in the company. Presently, there is talk of federal recapitalization of the banks, which would result in some government ownership of the banks.
This level of ownership invites control. It also creates opportunities to reward political allies with board of directors memberships and executive positions. The potential for corruption is substantial. In addition, extensive government ownership of mortgages creates the possibility of new initiatives in public housing policy. I agree with your point that these policies smack of socialism. In fact, I perceive a trend that approaches “market socialism”, where government owns the “commanding heights of the economy”. (
LINK ).
I suspect the current policy is not concerned with the long term; rather, the goal is to avoid short-term economic pain and defer economic problems as long as possible. In my original advocacy of the bailout, I had hoped the problems we are experiencing would be avoided. Clearly, it has not worked yet - so we may end up with the worst of both worlds. The present trends, if they continue, are likely to be destructive.
Two insidious problems concern me. First is wide-scale economic disruption. This will tend to destroy the savings of a great many people. This particularly applies to the boomers who expected to retire soon. The decline in value in the housing and stock markets reduces the value of their assets. The increase in prices reduces the buying power of Social Security and pension payments. The boomers can then be expected to call for government intervention, thus increasing dependency – and also increasing the tendency toward socialism.
Second is damage to capital formation. As independent risk-takers are supplanted, the ability to raise money for promising (but risky) ventures declines. However, growth is fueled by such things. So we may have sacrificed opportunity in a (failed?) attempt at avoiding market discipline.
On an unrelated note…foreign markets are down substantially this morning, and Iceland appears to be headed toward national bankruptcy. The Hungarian bond market has, apparently, failed. Unless some things start going right, we face further disruption of global markets.
The real problem is that banks do not trust each other right now, so letters of credit are not being accepted. This matters because global shipping uses such instruments to finance movement of goods – and right now, those exchanges are in freefall.
I begin to perceive evidence of panic on some internet boards. If the store shelves empty due to a breakdown in global transportation systems, then I expect to see a broader example of panic.
I am reminded of a quote from the Baron Rothschild. “Buy when there's blood in the streets, even if the blood is your own.”
I think the time to buy is approaching - but I don't smell enough fear yet.