The Goodfellas at the Fed

The basic pattern of Washington's financial panic continues: the more the government tries to stimulate the economy, the more depressed it gets.

According to the latest report in the New York Times, after hundreds of billions of dollars in spending, the stimulus is not working. The banks who were supposed to be saved by the first round of bailouts are actually in worse shape and need more federal cash.

Even before word came on Tuesday that Citigroup might split into pieces to shore up its finances, an unpleasant message was moving through Congress and President-elect Barack Obama's transition team: the banks need more taxpayer money... a lot more money...

The obvious question is: why are private investors scarce? Maybe it has something to do with the terms of the bailouts and "stimulus" aimed at them. The Times story contains only one hint at this:

Mr. Obama's economic team is planning a broad overhaul of the program to impose more accountability and more restrictions on executives at companies that receive government money.

"More accountability" means more government management of the banks; more restrictions means more measures designed to reduce the profitability of the banking industry and drive out the best talent. For an example of what all of this "accountability" means, consider the Wall Street Journal's overview of the government's treatment of the healthiest of the big nationwide banks, Bank of America.

After BofA shareholders approved the Merrill purchase on December 5, Mr. Lewis saw Merrill's assets plunge in value and began to explore a way out. At least he wanted a better price….

Mr. Lewis's effort to protect his common shareholders was vetoed by his most important shareholder, the feds.

In October the US Treasury had 'insisted' on investing $15 billion in his bank. Come December, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke told him that Merrill had to be saved, and that BofA had to be the savior….

In other words, the feds believe that the way to calm financial markets is to force the nation's largest, and a heretofore healthy, bank to swallow toxic assets it didn't want...

[this is an example on how government always screws the pooch when it tries to manage markets - can't be done. We must let the market work itself out with as little government intervention as possible - i.e., money if we must - but for heaven's sake no 'instructions' from government (unless you find Congress well run?)]

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