The Great Confounder

The Great Confounder is, of course, the very Government that is supposedly "By the People, For the People". We have made a concerted effort, throughout the various stages of economic deterioration and amidst the daily din of traditional media, to provide an objective assessment of financial market happenings. The disheartening truth is that, at each stage of the Recession, the Government has acted in such a way so as to Confound the problems, and provoke a subsequent "leg down" in the real economy. First, the Government grossly underestimated the extent of Bank's losses tied to subprime securities, and stood idly by as the industry's balance sheets became increasingly gangrenous in nature. Next, the Fed misinterpreted the issue as being liquidity related, and responded by aggressively lowering the Federal Funds rate. A brutal commodity price spike ensued, causing significant damage to the average consumer's personal finances. Next up was Lehman Brothers, a systemically significant institution that, in an epically fatal decision by the Government to "draw a line in the sand" ,was allowed to fail. 3.3 million jobs lost later, the world is still reeling from the shockwaves that emanated from the Lehman bankruptcy.

At present, Congressional fixation upon the bonuses paid to a group of AIG traders has effectively annihilated the political will for additional Banking rescue efforts that might originate in the Congress. Future bailout schemes, such as the one to be announced Monday, will rely heavily upon private sector participation. Unfortunately, these are individuals who have been vilified and alienated by a Congress intent on capitalizing politically. We have continually asserted that, in order to garner substantial private sector support for any Program, the Government must provide a set of precise, immalleable Rules. A 90% ex post facto bonus tax does little to inspire investor confidence in dealing with the Government.

While we hope it not be the case, we are concerned that Government-led AIG furor may be a pivotal point in the Crisis. The Government has likely lost, for quite some time, the ability to engender private sector support for its rescue efforts. In a sense, a void has been created, one that will be quite difficult for Geithner et al to fill. Sphere: Related Content