The Federal Reserve in effects “prints money” by providing funds to the banking industry, which in turn lends these funds to companies and individuals. In the current mess, the Fed is creating more money in a shorter period of time than ever before. When too much money chases too few goods, the price goes up, in this case, way up. If the Fed and Treasury and the new administration accomplish their goals, we will shortly have rampant inflation; maybe not on the order of Zimbabwe, but to such a degree that the Dollar, the world’s currency for 40+ years, will be seen by investors foreign and domestic, to have substantially reduced value. Maybe even a dollar run, although China (500 Billion + dollars invested, Saudi Arabia-0ver 500 Billion invested, and many others) will have to make a decision about how low they want to force the dollar in order to sell their dollars and buy other assets or currencies.
A financial advisor used to say “Owe a lot, not a little. They will love you more and value you more if you owe them so much they can’t afford to demand repayment.”
Almost any rapid increase in “printing” money is axiomatically followed by increases, sometimes rapid, in inflation. The Bubble is coming.
No matter how you define the problem or propose solutions, the market must be allowed to seek equilibrium.
This means that losses must be realized at the point of origination, and in the case of all these downstream investors, backtracking to the source.
While difficult, not impossible.
In the end, after losses are taken, government can then step in to either nationalize (for later distribution/resale to the public), or re-capitalize the system with the kind of debt/equity that allows the taxpayers to be paid back and to include a nominal rate of return, which convertible securities could offer, along with Convertible Preferred and equity investment allocations as advisable.
(Let me note here that as part of this solution, I have recommended that these government investments be pooled into an Investment Trust as part of restructuring the Social Security system.)
All in all, after 40 years of investing in all kinds of markets, and starting new businesses thereafter, after working 80+ hour weeks in startups, I have observed that the free marketplace can work, if allowed to.
Having said all that, I still allow for government intervention, because I see that as a way to avoid or minimize the depressing effects of a financial system out of control. The role of government in free markets is to provide transparency, and assumes that investors can therefore adequately evaluate risk, and make appropriate decisions.
If that is an adequate structure, then it stands to reason that artificially interfering, offering political idealism rather than transparency, is wrong. Wrong for capitalism, wrong for Democracy, and wrong for our society.
In all fairness, the punishment that must be enacted on the perpetrators of this mess is civil; the financial death sentence of losing their capital; jail time where fraud is involved, and no slap either, real time, multiple years.
Government must intervene only in the way that makes long term sense, as capitalists.
And in this sense as well; government regulation of financial markets must provide for understanding that corrupt and greedy investors exist and will exist; new ones replacing old, looking for regulatory “holes,” dishonestly seeking unjust enrichment at the expense of others.
Transparency must seek to limit any damage they can do.
Such outcomes will never be totally avoided, but as the current situation more than adequately evidences, there are ways for markets to be free, yet transparent, and guided when necessary, not for social goals, or political goals, but for the safety of the markets themselves.
In the answers must be ways to limit public losses to the invested capital of investors. That may mean that higher levels of capital are required as financial institutions increase size, and may also mean that leverage, through margin trading, through debt/equity ratio management, must be controlled to a greater degree.
This solution, and others proposed, try to deal rationally with irrational circumstance; govenment promoted the policies that led to the financial meltdown, and subsequent lockup of financial markets. The financial markets anticipate the Fed and Obama administration will make it possible for them to get rid of their losses (print money) and start the process over again.
Notwithstanding the actions that Treasury and Paulson have taken, the banking industry sees the way out as the Fed printing the money necessary to bail them out, allow their continued participation in financial markets, and maybe, just maybe, keep their jobs and get greedy in a new direction, in some way we haven’t thought of yet, and which will fail to be addressed by regulators until the foul deed is accomplished.
Free markets have generated the American Experience; free markets must be allowed to continue.
Bubble Inflation does not serve that purpose.