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4:35 am - Tuesday November 12, 2019

The Limits of the System

| Economics, Investing | Rating: 4.5
by Numan

A massive scale bailout reminds us the limits of the system

Churchill is often quoted saying “Democracy is the worst form of government except for all those others that have been tried”. To paraphrase on this famous saying capitalism is probably the worst from of market behavior except for all those others that have been tried.

The shiny knights of capitalism have taken yet another blow responding joyously to a bailout of fantastic scales. Fannie Mae and Freddie Mac, the famous former federal agencies are literally bankrupt leaving the government no real choice.

Devoted capitalists should be outraging right now. Bailing out a bankrupt corporation stands in sharp contrast to any and all “true” capitalist ideals. How will the markets clean themselves of failing corporations, managements and business models?

The problem with ideals is their practicality or lack there of. It is quite easy to see bailing out Freddie Mac and Fannie Mae was the only real alternative the government had aside from letting the markets descend into complete and utter chaos taking the global economy with them.

Considering the impact on the global economy the US government should send a part of the check to many foreign countries whose economies are getting bailed out as well during the process.

Ironically enough, on the day the government announced the bailout market responded with sharp surges upwards in stock prices. Capitalism takes a blow and investors cheer. The reason is obvious enough: The price of risk just got limited. No one had to share their earnings with the government when risks paid off, aside from taxes, usually somehow avoided as well. When risks are costly no one seems to pay the price, other than the citizens of the US of course.

That’s not entirely true though. Stock owners of both Freddie Mac and Fannie Mae have lost the vast majority of their investment even if bond owner got a lucky break. Bear sterns stock owner lost the majority of their investments as well.

There are more surprises in stock and the chaos is still present and stronger than ever. I can’t explain the 40% increase in Freddie Mac and 40% cut in Lehan Brothers’ stock aside from sheer panic and confusion.

The wise investor will keep clear of the markets unless you’re there for a very long time.

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