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Monday, September 15, 2008

Eventful Week

Between Hurricane Ike and activity on Wall Street, this week has not been boring. Once again, the government is being asked to bail out a major financial player. American Insurance Group is begging for emergency funding. This comes just a couple of weeks after the government bailed out mortgage lenders Fannie Mae and Freddie Mac. How many times are we going to repeat this song and dance? In addition to this, Lehman Brothers investment bank declared bankruptcy this morning and Merrill Lynch sold out to Bank of America to the tune of 50 billion.

The only thing we can be happy about is the fact that Hurricane Ike did not take out the refineries on the Gulf, so gas prices plummeted today below $100/barrel. This does not improve the dangerous situation that the banking industry finds itself in as they feel the effects of the bottom falling out of the sub- prime lending sector. When major companies such as the ones mentioned above sink to the point that a government bailout is the only solution, it makes me very nervous about entrusting my money to them or anyone affiliated with them. With the state of credit as it stands and more and more mortgages being defaulted on, I begin to wonder if I may live to see the failure of precautionary measures taken after the Great Depression.

While I don't pretend to have a solution to the mess that these companies find themselves in, I am seriously concerned about the wisdom of allowing the federal government to bail them out. This, to me, completely undermines the entire concept of free enterprise by creating a dependent relationship between the government and the companies facing demise. Sell the company off piece by piece, or to the highest bidder/competitor, but don't sell it to the entity that is supposed to be the only unbiased mediator in fair trade. If these companies are this far gone, I don't really see much hope for them to pay off the additional money they are asking the Fed for which essentially means that sooner or later we may have what amounts to a government owned sector in the banking and insurance industry. Who wants to entrust their money and backup plan to the good old boys in Washington?

Comments:
I agree with most of what you have to say. I think the government sould stay out of it and let the market work. However, you say "it makes me very nervous about entrusting my money to them or anyone affiliated with them." I say this in response: I believe this was the cause of the mess to begin with. You, nor anyone else, should never entrust your money to anyone. Maybe the problem is that we have become "rational investors" in the sense we just put our money in a 401k and never think to research where it is going. Maybe if more people spent anhour during the week to actually see how there money wasbeing managed instead of watching Survivor, then this may not have happened.
 
I think the government is staring to learn its lesson... by letting Lehman Brothers fail, it sent out a strong message to banks: "This reckless behavior in the future will not be tolerated. Tax money will not act as a safety net." Obviously the government is doing this on a case by case basis and intervened before Freddie Mac, Fannie Mae and AIG failed, simply because it deemed their failures would be too catastrophic for the market.
However, some people believe the whole crisis started after the passage of the Glass-Steigal Act, which in effect removed all regulations from banks. Banks then were free to engage in risky investment and loan practices. Therefore, these people argue, the failure is the result of too little government intervention, not too much.
 
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