The Financial Bailout Fiasco

Richard SalsmanNear the end of nearly every bear market and banking crisis in modern times typically comes what might be called the "scapegoat phase" — a grueling, seemingly endless, multi-month period of further bearishness due not so much to worsening, underlying fundamentals, but to business-bashing, populism, demagoguery, Congressional show trials, and legislative-regulatory uncertainty. In this rather ugly phase, public attention is deflected away from the real perpetrators and toward those who either didn't cause the crisis or are its victims. This sheltering of the guilty is achieved by blaming and punishing the innocent. We're now going through just such a phase – all ginned up, due to the election.

Consider just some of the bearish injustices we've seen lately. American taxpayers, 95% of whom pay their debts on time, have been forced to finance more than $1-trillion to bail out the fraction of those people and firms that are deadbeats, whether on Main Street or Wall Street. We've seen protections (and $200-billion of taxpayer funds) afforded to Fannie Mae and Freddie Mac, those corrupt, mismanaged and insolvent quasi-state mortgage entities that now control 60% of the U.S. residential mortgage market. We've watched healthy banks with minimal exposure to the sub-prime loan debacle compelled to take "equity injections" from the U.S. Treasury and, in turn, forced to freeze their dividend levels and restrict the compensation of their top performers, thereby curbing incentives to continue performing well. We've witnessed politicians like Sen. Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA) getting away scot-free, while raking in millions of dollars in campaign funds, as heads of powerful committees that enacted the very laws which authorized the bureaucrats to perpetrate this credit-housing mess in the first place.
by Richard Salsman, CFA
More at: http://www.capmag.com/article.asp?ID=5340