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Tuesday, October 7, 2008

Whack-a-molenomics

Today, the Fed is lunging at the commercial paper market. Almost in response to the plugging of one leak, paper problems shoot out of the next best crack – in commercial real estate, at Morgan Stanley (though they deny it on the tape), in the autos. Once again, the Fed is engaged in a very dangerous game of whack-a-mole with the markets. Even if they hit the one popping up today, there's going to be another one primed and ready to go. They cannot save everyone.

And here we get to the big problem with the bailout. It will disproportionately aid those with congressional ties. No one is going to tell you that outright but take a look at the big picture. We have multi-billion dollar companies begging for government intervention. The new mantra in banking is get too big to fail or fail. The Fed window has quickly turned into a soup kitchen line with a velvet rope. When the soup starts to run out, there's going to be less trickle-down.

Until we have free markets, our markets won't function properly. That means short selling, that means companies that mismanage their businesses disappear, it means that if the fair price of our market could be significantly lower. Like it or not, that's the way it's got to be. No one… not even the Fed… can dictate fair value. If they do, it's inherently unfair value and it will quickly become perceived as a rigged game that no one wants to play. That's what we're seeing so far, right? That's what this is all about: money hiding from the scary paper.

I fear that this is going to resolve the same way whack-a-mole does. We lose a quarter and get some useless booby prize… except in this version of the game we don't get to have any fun.


 


 

1 comment:

drfinn said...

Its one thing to let LHE and BSC go under, but if the commercial credit doesn't start back up we'll be talking about companies like AT&T, IBM and others. All of the airlines and car companies will be bankrupt...

Seems to me that the major problem is that the people who have the dollars (China) don't want to lend it to anyone except the Us Goverment. So the US govt has to act as the intermediary until the people with dollars (China) start lending it to people again.

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