Competing with the government

Listening to some of the talking heads, I was surprised to hear one or two them finally get it right about why the "bail-out, rescue, stabilization" plan isn't working. It's what I told you earlier this month when I mentioned that the government was going to start buying banks and equity positions:

Capital doesn't want to compete with the Government since the Government has two major advantages:

1. The government can change the rules to their advantage

2. The government can raise an unlimited amount of capital by printing money

With these two overwhelming advantages over private capital, why would private capital want to get involved in the areas where the government is "bailing-out?"

Answer: they won't!

So why does the rescue, bail-out, etc not stem the tide of stock market volatility? Every time the government "rescues" the next area, private capital leaves that area. Stay with me on this one.

First it was the Investment Banks (Bear Sterns, Lehman Brothers, Merrill Lynch, etc), and what happened there? All 5 of the last Investment Banks are gone; Wall Street is completely changed forever.

Second, it was the mortgage market (Fannie Mae, Freddie Mac) and what happened there? Countrywide, WaMu, Wachovia and others all with heavy mortgage holdings and even the big banks overseas began to fail. Governments all over the planet began to take them over.

Third, it was multi-faceted insurer (AIG) and what happened here? AIG gets over 110 Billion USD taxpayer dollars and then uses it to support executive bonuses and senior-level manager's junkets while AIG continues to feed at the taxpayer trough.

Fourth, it was the commercial banks (BoA, Chase, Citi Group, Wells Fargo), and what happened here? The monies that the Treasury via the Federal Reserve are now being used to buy out smaller competitors further concentrating the power of the financial system into a fewer number of very large institutions: the exact process that got us into this problem in the first place.

Fourth, and now the government wants to take equity positions in small insurers (State Farm, Allstate, GEIGO, etc) and what will happen here? These companies will dump their high risk policies onto the tax payers' back and then go back to their bad insuring practices since the government have socialized the risk.

Bottom line? Every area the government gets into will suffer from the LOUC (law of unintended consequences). Pure and simple.