Wednesday, September 17, 2008

On flipping flopped companies

Looks like the Fed is flipping and flopping a lot like the McCain campaign in its policy pronouncements. “Being for something before being against the same”.

When the financial markets were melting down on Monday with Lehman going under and jobs lost all around, McCain coolly comes up and tells us that the economy is strong. Later he backtracks and says that he was talking about the American people and not the health of the economy actually. Likewise, the Fed initially said that they will not bail out AIG before actually deciding to bail them out late evening yesterday. Yes, it called for an injection of $85 billion of taxpayer money this time. Of course, this is on top of the bail out of Bear, Fannie and Freddie.

The latest bailout might be labeled as the ‘mother of all bailouts’ since it was not just the company (AIG) that was bailed out, but all those toxic assets from companies that AIG had insured. In essence, AIG's clients still got to chew on their toxic mortgage meatballs while the taxpayers stepped in to foot the bill. Of course, many will advance the argument that AIG was 'too big to fail'. Even if one agrees with this theory (yes, this too big to fail thing is fast becoming a theory as more and more banks are signing on the bailout bucket list), the bailout should have come with regulatory conditions that will prevent this mess from happening again. Of course, none of that happened. Taxpayer money was pledged to straighten a large Wall Street firm with minimal guarantees ensuring the survival of the firm, ensuring the people at the top get their regular bonuses and also ensuring that nary a legislation or regulation is passed that would have prevented a meltdown like this from happening in the future. Well, this is free market at its best.

Two things were clear after the latest bailout: The first being that the Fed is absolutely clueless and has just about zero control over the rapidly deteriorating situation in the financial markets. The other being that we have just further slowed down what was essentially an already very slow moving financial train wreck. What is that expression of Chinese torture – death by a thousand cuts – is what we will be subject to….

No comments: