Jeff Neal for C.U.R.E. - Certain Unalienable Rights Endowment

Anesthetics, Job Growth and The Bazooka

In Economics, Financial, Opinion on February 5, 2011 at 4:46 pm

Notwithstanding that none of them actually say this, a read of the books and reports about the financial panic of fall 2008 leads to this conclusion: the capital markets will remain relatively stymied and stagnant until they are freed of government intervention and arbitrariness. “Saving” GM and AIG and similar acts that purported to prevent or eliminate the pain of failed business plans are the equivalent of giving the financial system anesthesia. When the drug wears off, unless the disease has been cured, the pain returns and is usually worse. That’s where the US economy is headed. Government actions are propping up the price of certain assets and securities, but government actions are driving down the value of those assets and securities, particularly in the real estate sector. When price finds value, as the market forces say it must, it will be a steep and painful fall that will destroy trillions of dollars in wealth.

Markets seize up due to what has been called ‘regime risk,” and that is the primary cause of the loss of value – the lack of liquidity; money is not flowing to its most productive, profitable uses.  Uncertainty in the rules of the road paralyzes the market, robbing it of one of its key supporting characteristics – the truth. Other risks can be assessed and quantified; regime risk can not be.  When capital seeks safety, risky, innovative ventures starve, and we get lackluster job growth.

To get a sense of why the investors are reticent to bet on the future, one might read Hank Paulson’s book On the Brink. It is a confessional about how he, among other abuses of power, scared Congress into giving him a “bazooka” so he would have enough power to “save the financial system as we know it” (and feed the victims to whichever bank or crony was on the right side of the conference table). That kind of arbitrary, extra-legal behavior by the government makes market participants keep their wealth in protected, safe investments, rather than deployed in risk-taking, innovative ventures. None of the capital market’s participants who are not ‘lobbied-up’ will step up to the black jack table so long as the politicians are in the back room deciding with the lobbied-up crowd whether sometimes the dealer’s 23 beats 21.

Oh, and now the “other” team has the bazooka, a development that Mr. Paulson reveals that he does not appreciate. He writes that he was surprised when candidate Obama, previously having been so engaging during the 2008 campaign, stopped talking to Mr. Paulson the day after winning the election. DUH, Mr. Secretary; the bazooka conveys with the presidency. “What use are you to me now?” was President-elect Obama’s clear message to outgoing Secretary Paulson, and poor Hank had no idea he’d done it to himself.

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