The reality is that the Fed has started taking the same proprietary position towards the financial markets that a bank takes towards its loan portfolio. They are reinforcing the old axiom "If you owe the bank $100, they own you. If you owe the bank a $1,000,000,000, you own them." Let's look at the behavior.
We can go back to the Chrysler bankruptcy, the bailout to save jobs. probably a good thing but a disastrous precedent. Because then we got the savings and loan debacle where the bailout was to protect the capital - not the jobs.
Let's continue below the fold.
Then we got Long Term Capital, now we are protecting the market against the stupid model. And where are we now? A stimulus package to protect the financial market against stupid business practices.
The justification is that if we don't salvage the financial markets the US economy falters. But let's examine the underlying issues:
First, most fund capital has been being shipped off shore. What does a stimulus package to salvage the US housing industry do to attract that capital back? Nothing - in fact, it is likely to drive even more investment offshore. Why? Because a massive stimulus package either requires dropping US interest rates a bunch (Cramer was on CNBC this morning calling for a full 1% drop in the Fed Funds rate - can you say $2 per Euro?) or a $100 Billion increase in the deficit (ditto the effect on the dollar). In either case, that means that overseas investment have an automatic 20%+ return advantage over investments in the US due to the dollar dropping. So, the Fed acting to protecting investment creates disinvestment in the US.
Second, and worse in my opinion, let's follow the money. We are setting up a perverse "compensation scheme" in the economy. If I invest wisely and conservatively, I might get a 8% return, for example. If another person invests like they are gambling, they can get a 25% return if they are right or get bailed out by the Fed, if they are wrong. My 8% return is likely to get slammed by the overall market in the instance they are wrong.
So we have a case where the gambler gets 25% versus my 8% if they are right and bailed out (versus me not getting bailed out) if they are wrong. The Fed is practically demanding stupid business practices.
I am astounded - but then I watched the same stupid behavior from a lot of trading companies in the late 90s too. All I can say is that if the Fed acts to protect the market this time, the next blow up will be twice as bad and so on until finally the Fed can not save us from the idiots and the whole thing crashes. I am so tired of this crap.