Government as Capitalist (Jeff Hankins Publisher's Note)

Why do I suddenly feel like the world's greatest capitalist nation has taken giant steps toward socialism?

The U.S. government has taken control of two-thirds of the home mortgages in the country (Fannie Mae and Freddie Mac) and the largest insurance agency in the world (AIG). It already controls the health care industry. Will General Motors be next?

The federal government did what it had to do to help salvage a world economy on the brink of disaster. However, the actions have resurrected words like "greed" that were applied in the 1980s to bond daddies and the savings and loan crisis. Businesses are going to pay a hefty price for this, especially now that the developments have become the central issue of the presidential campaign.

Our tax dollars are paying for the mistakes of business behemoths that were paying obscene salaries and bonuses to executives who are supposed to be so talented at running companies. The typical consumer now will say he's being gigged from every angle to support the lavish lives of people who don't know what they are doing.

Those of us who fight for less regulation from government will have a monumental battle on our hands. We'll have to argue that government isn't even capable of enforcement, considering that all these financial institutions and brokerage firms allegedly are among the most regulated entities.

It's becoming clear that just because regulatory agencies and procedures are in place, they aren't necessarily effective or useful. Regulators spend an inordinate amount of time and money on small banks and investment firms while the giant financial institutions whose failures can have an immediate global impact have clearly been under-regulated and mismanaged.

The blame game now ensues. The Bush administration will bear the brunt of the criticism and probably should because it has controlled the regulatory agencies for the past eight years. But the Clinton administration pushed government and the private sector to make home purchases easier – think subprime mortgage risks – and the Democrat-controlled Congress failed to address significant problems, including Fannie Mae and Freddie Mac.

We can talk about how government failed or enabled behavior, but I'm far more irritated by the terrible business practices that led to the credit mess. Who decided "zero money down" mortgages were a good idea? Why did lenders and appraisers enable all the irrational exuberance – such a great term from Alan Greenspan in the dot-com days – in housing prices? And why didn't consumers think twice about prices and rates they were willing to pay?

The world economy needs major investment banking firms like Bear Stearns, Lehman Brothers and Goldman Sach to facilitate major transactions. The world economy doesn't need insolvent financial institutions that carry too much risk, not enough capital and too much debt. I suppose we have to trust that the likes of Bank of America, which is acquiring Merrill Lynch, can maintain a strong balance sheet and take a more conservative path to growth and profits.

Local stockbrokers for the national firms will face challenges and uncertainty that they didn't bring upon themselves. The consumer confidence factor will be in play as clients realize that the firm they trusted for sound financial and investment advice couldn't manage its own money.

The impact of the credit crisis on Arkansas could escalate in the area of bond funding. Municipal bonds remain good investments for safety, returns and tax benefits. However, large bond issues require institutional investment, and that's where the shortage of national players and capital will come into play. A big slowdown in bond issues would have a chilling impact on government-related construction projects.

I hope Warren Stephens at Stephens Inc. and Rush Harding at Crews & Associates are right, that ultimately the monumental shift in the investment banking landscape will present good opportunities for smaller firms like theirs.

For now, we're left to wonder what other surprises may be lurking in the financial sector and how much more help Daddy Government is willing – or able – to provide before saying enough is enough.                         

(E-mail Jeff at jhankins@abpg.com.)

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