Kaopectate for Cholora

Treating symptoms does not cure illness even if it feels better. Fear. Fear and Greed. It is merely a pendulum that swings from one sentiment to another. Currently fear is in charge and those who can keep their heads will pick the pockets of those who haven't. The derivative markets had provided substantial obscurity to the value of assets and congress is being asked to provide systemic salvation with information provided by Wall St. Permitting congress or conversely the Treasury Department to determine the price of these assets is fraught with combination of temptation for abuse in the investment sector and a fear of blame in Congress. Can there be a more toxic combination? It remains to be seen what the final package will look like.

There is no shortage of capital in the world. There is a shortage of capital in the risk taking banking system. Risk was mispriced substantially because of the volume incentives in banks creating the mortgage backed securities. The request of the Treasury now,is to transfer capital from taxpayers to those banks. Those who took the most risk and made the largest mistakes are about to reap the greatest benefit. Having been for a number of years sadly sceptical of the correct functioning of a perverted capitalist model we now have an opportunity to snatch back the goodness of the free market from hands of those who abused it. What are we doing instead? Fighting back with a socialization of the losses of the profligate money changers. It is bad economics and bad public policy.

Lehman Brothers declared bankruptcy last week. There was fallout certainly. I know of an innocent investor who has seen his Lehman money market funds at his brokerage account frozen. He can't withdraw it or use it for investment. If this relatively uncommon event were to multiply across the market it would have a devastating effect. This is the type of outcome that has congress white with fear.

But the Lehman Brothers bankruptcy resulted in the company being bought as a going concern by Nomura in Japan and Barclay's in Europe and the U.S. That transaction resulted in a price whereas the bailout further obscures value and forces the taxpayer to pay more than the market and be the least senior creditor. Unless the final bill includes both protection for the taxpayer as well as participation on the upside it should not be passed.

The ensuing problems to the economy will be with us for some years but I believe the solutions should be more focused rather than random and wholesale. Let me believe in the capitalist model again, balanced to prevent abuse while allowing entrepreneurial incentives to succeed as they once did. This is the opportunity to clear out the excesses of a perverted system without the clumsy hand of government intervention. It is regulation which is needed, not distortion.

John Barnyak