Just read the details on the Fed’s most recent intervention in the capital markets. Another trillion dollars + thrown after bad money. All in the name of “preserving the bonuses of fat cats capital markets.” (read the excellent Bloomberg piece here…) I especially like the image invoked by the writer of Ben Bernanke playing the financial equivalent of fictional renegade special operations warrior, Rambo. I bet he gets an even better hedge fund job after he leaves his post than his predecessor did. (See article on how Greenspan joins the hedge fund that made billions shorting the bubble Alan denies he created here…) It seems that the news just keeps flowing and so do bonuses… and the person on Main Street that has been raised with the concept of “fairness” and manners and trying to be reasonably well behaved is mystified and left asking, “How is all this happening and why doesn’t our government stop it?”
Simply put, the government and financial services are caught up in their mutual addiction to each other in the form of government enabled liquidity. While many rationalizations can be made, a free market requires the government to ensure stable regulations, reasonable controls against unfair practices and a strong legal foundation for business. In the current scenario, it appears to me that what has happened is that the financial services industry and government have gotten caught in a symbiotic relationship that prevents these real solutions from unfolding.
How has this happened? The markets are reasonably efficient. Therefore it is very difficult to make money in the market by investing prowess. So investors seek to change the market efficient landscape so that they can make money. The easiest way for that to happen is to lobby the government to make increasingly favorable policy actions that enable continued outrageous profits.
Government leadership seems to have an incentive that once they leave office, wealth awaits them by joining the financial community. Cases in point, much of the early leadership of the Carlyle Group, one of the world’s largest private equity funds, consisted of former government officials such as former President Bush, James Baker and John Major (former British Prime Minister). In fairness, many of these former politicians have retired from active service, but they nevertheless were there and current roles (if any) are non-public. Robert Rubin, former Secretary of Investment Banking Treasury in the Clinton administration joined the board of Citigroup for the years prior to its fall in stock price, Alan Greenspan, former Chairman of the Fed during the period the housing bubble occurred has joined a hedge fund that has profited billions in trading the housing bubble correctly. And according to the previously linked Reuters article dated in January 2008, former Treasury Secretaries Lawrence Summers and John Snow have been advisors to D.E. Shaw hedge fund and Cerberus.
I have concluded that intervention is exactly what is needed. However, it may not be the type that Ben Bernanke and the cabal of government, hedge fund, banking and high finance want. When an addict is in denial, there is a tool that can be used to help them break that denial– it is called intervention. It is a process whereby an addict’s friends and family gather around them and confront them with the facts of their addiction in the hopes that they will come to their senses and realize the truth of their dire situation. Who should do it and how or even if such a thing could happen are all doubtful from where I sit. But one thing that is certain, without an intervention, an addict must hit bottom and then decide to get better. Let’s hope that we can avoid this path.