One of the dominant myths of America is that we practice one of the freest forms of capitalism on the face of the planet. Hard work and prudence are rewarded, while Schumpeter's 'creative destruction' quickly cleans out the mistakes.
Unlike most myths, this one apparently lacks a kernel of truth at the core.
As the details emerge over the various bailouts and market distortions, it is becoming clearer that moral hazard has been increased, not lessened, and that those who behaved prudently during the credit bubble insanity are going to be punished.
Some are getting angry:
[quote]Community banking executives around the country responded with anger yesterday to the Bush administration's strategy of investing $250 billion in financial firms, saying they don't need the money, resent the intrusion and feel it's unfair to rescue companies from their own mistakes.
And in offices around the country, bankers simmered.
Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was "much chagrined that we will be punished for behaving prudently by now having to face reckless competitors who all of a sudden are subsidized by the federal government."
At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. "We don't need a bailout, and if other banks had run their banks like we ran our bank, they wouldn't have needed a bailout, either," Adams said. [/quote]
Free markets? Fair competition? No, not really. Not at all.
This next article puts that in high relief. The Fed was going to buy corporate paper in an attempt to loosen up the flow of money in those markets, which would have been an admirable goal, in and of itself. But the Fed, for some reason I do not yet know, decided to insert a massive distortion into the market at the same time.
[quote]Oct. 15 (Bloomberg) -- The Federal Reserve may subsidize America's companies by purchasing their short-term debt at rates below those demanded by private investors in the $1.6 trillion commercial-paper market.
Fed officials yesterday set the yield they will pay for commercial paper at about 1.6 percentage points less than the average cost for financial companies, weekly central bank data show. Policy makers last week announced emergency plans to buy the securities after the market shrank to a three-year low.
The discount cuts the cost of cash to 2.2 percent from 3.7 percent for General Electric Co. and from 4.7 percent for Citigroup Inc., data compiled by Bloomberg show. One possible unintended consequence: private buyers are shut out. [/quote]
Citigroup has a gigantic "Level 3" asset pool of more than a trillion dollars, and the free market decided that, because of the additional risk associated with those past decisions, Citigroup should pay a higher rate of interest on their debt. The Fed has now decided that Citigroup and GE (a very sound company) should pay the same rate to borrow. What's next? Dictating that everybody should pay the exact same mortgage rate? Isn't that exactly what got us into this mess in the first place, a distortion of the market's ability to properly price risk?
The Fed may have had good reasons for this, but it is one more very large intrusion of the government into a formerly free market. Such interventions distort true pricing, and it is a virtual certainty that the Fed will both subsidize this market and end up the owner of a lot of defaulted debt. This monetization of bad debts is among the most inflationary of all possible Fed actions.
And even as real problems mount in the real economy, all of the Treasury Department's and the Federal Reserve's attention seems to be focused on the banking system, to the almost complete exclusion of the needs of regular people.
To put all this in context, I am going to repost a snippet from a comment made yesterday by reader Davec007 (Dave Cohen):
I have not commented up to now, but now that we see the trajectory of the Fed's "intervention", I have a few things to say.
From an energy perspective, it is now clear that any adequate response to the oil supply/price problems we will have after this U-shaped recession is over will be impossible. Most of the funds that might have been put into infrastructure changes (long-haul railroads, light rail, restructuring the geography of living & work, adding large amounts of renewables to the grid, etc.) have already been given to the banks.
The "save Wall Street to save Main Street" rhetoric has not only served to facilitate one of the largest rip-offs in history, but it has doomed the "real economy" to a state of perpetual recession, or worse. We had a taste of Things To Come when oil hit $147/barrel, and we had another in the last few weeks when crude oil production in the United States fell below 5 million barrels per day for the first time since 1946. This latter was due to the hurricane disruptions, but such production numbers will become routine after 2012. You read that correctly -- since 1946.
I only wish and hope that when our true emergencies in energy and infrastructure are made clear to the DC crowd, they respond with the same urgency and magnitude as they have in their near-immediate multi-trillion dollar bailout of the reckless and the imprudent.
This is a companion discussion topic for the original entry at https://peakprosperity.com/punishing-the-prudent-2/