The Government "Investment/Bailout" (Whos' to blame, what to do)

Would we be talking about a "crisis" today if the Federal Reserve had not embarked on unprecedented monetary and credit expansion, in the process inflating a housing bubble of epic proportions similar to the late '90s Internet bubble? Or the bubble of the Roaring 20s? Isn't the entire housing edifice built on shaky foundations since Freddie and Fannie enjoy a protected lending status with all sorts of moral hazard implications? Wasn't it former Federal Reserve Chairman Greenspan who not long ago urged borrowers to shift to variable rate debt, most of which is now resetting at a perilously higher level?

The free market has not failed, the market is simply correcting the mal-investment brought on by governmental interference. Let contractual arrangements remain in force, let good lenders prosper and bad ones suffer (similarly with borrowers) and let the taxpayers' pockets go unpicked. Legislative interference with market processes is likely only to prolong and deepen the downturn. The 700B in “New” liquidity is simply being printed up as before.

In the Austrian theory of the business cycle, the distinction is made between the "primary" and "secondary" depression. The secondary depression is what catches the eye: the turmoil in the financial markets. Yet the underlying cause is the distortion of the economy's capital structure: the primary depression. We have this economic crash today because our growth over the years has been phony, because our growth has been a product of what we’ve barrowed and spent, and not what we’ve saved and produced. You had millions of home owners who really thought they won the lottery, they looked at home prices that had been bid up in a speculative bubble, and assumed that the equity was legitimate wealth, and they borrowed Trillions of dollars, collateralized by that, expecting that by the time the payments were set higher they would have all this extra home equity that they could also tap into. That didn’t happen though, and now Americans are losing their home equity, they have trillions of dollars of mortgages that they can’t pay, and all the consumption that went along with the perception of real-estate wealth is going to evaporate. It is this reason that you will see a bigger crash in the economy, because its 70% consumption, and we can’t consume anymore, because we can’t borrow anymore and we don’t have the equity.

A true and complete Economic Recovery Plan would involve a Natural economic overheating, and massive capital reconstruction.
Removing:
The Capital Gains Tax,
The Income Tax,
The Federal Reserve,
The Federal Deficit,
Sarbanes-Oxley(particularly the Mark to Market rule… This is what killed Merrill Lynch.),

Sadly, none of these things will happen or even get mentioned. Hardly a day goes by without someone's proposing how to make the bad situation in subprime mortgage lending even worse. I cringe when I hear people talking about how Short Selling should have been done away with long ago. Short selling increases the number of people with an incentive to discover valuable information about firms' prospects, by providing an added mechanism to benefit from information that turns out to be negative. That in turn allows for a more true value for the market worth. When someone's research or information leads them to negative conclusions about a firm, short selling allows them to communicate their less optimistic expectations to others and make a profit if they anticipate the direction the market will later come to agree with. That is, they profit only if they come to "correct" conclusions before others. In the process, they benefit others by revealing accurate information sooner than would otherwise be the case, reducing the mistakes people would have made from relying on the less accurate prices that would otherwise exist. Personally, I’ve always seen Short Sellers as policemen of the market… But as I’ve said before, the government doesn’t want the true values, they just want rising stock prices. The old Progress before Stability routine.

I simply can’t agree with this Federal Investment, both for moral and economic reasons. Capital reconstruction is the solution to the problem, not further devaluing the dollar which was partly the cause of our problem to begin with! You also must remember, even if this “Investment” takes place, and it maintains the status que for a bit longer… it will not make up for the fact that the true equity and capital is gone. Anything else will be fake, false, and short lived.