Biggest Political Missteps Of The Recovery
Shooting Off Your Own Foot
There has been no shortage of missteps in the ongoing bailout of the financial system. The general feeling through the chaotic days between Lehmans and AIG was that taking action was more important than delaying until the right action became clear.

Sadly, when business and politics mix, the offspring is likely to have two heads and serious emotional problems. Here are the biggest missteps thus far.

Threatening AIG Bonuses
Politically, it made perfect sense. Public outrage was widespread when it turned out that some of the same people who sank AIG would be walking away with millions in taxpayer-backed bonuses. Threatening to up the tax on bonuses to 90% was a brilliant political move to simultaneously say to the public, "we hear you," as well as, "we're against them too."

Unfortunately, it revealed to Wall Street how mercurial a business partner the US government is - companies don't want to be bailed out with a 5% loan if the true price includes public flogging, the circumventing of contracts and countless other strings (hire American, buy American, etc.).

Free market thinkers from Adam Smith on insist protecting property rights and the sanctity of contracts is the most important task of the government, so it's worrisome to say the least when governments begin attacking either. (To learn more about free markets and government regulation, read Free Markets: What's The Cost?)

Bleeding Investors
Investors have been bitten several times throughout the bailout, but what happened in the auto industry is by far the deepest chomp. Mere months after attacking the sanctity of contracts, the government decided the bankruptcy process that has served for centuries needed a makeover.

Instead of secured lenders seeing the first payout, the unions and the government ended up running away with most of GM and Chrysler. This buys votes, but it is going to freeze up private lending down the line. That probably won't hurt GM or Chrysler because they're already nationalized, but Ford might have something to say about its higher cost of lending in the future.

Fleecing investors has also put the success of the government-led program to have private investors buy toxic assets in serious jeopardy. Fool me once, shame on you. Fool me twice…

Mixing Issues
The biggest problem with the bailout is the mixed signals. While trying to save the auto industry, the government is also hampering it with stricter standards (CAFE) before the two bankruptcies are even over.

While trying to stimulate the economy, the government is also trying to set up universal healthcare and other large programs that will lead to more taxes (either direct or through inflation) and depress future growth.

This happens because there are too many voices and too many minds trying to direct policy. Some want a return to free markets, some see the bailout as a chance to try out socialism and so on. This shows in how much proposals change in their long, arduous journey through the political system. For every step forward, there are three left, one hop and a pirouette.

Finding Safe Haven
Investors are as nervous as Wall Street now that they're sharing the market with the government. In an era of comparatively less government involvement, the great money manager T. Rowe Price made it a rule to get out of any industry with high levels of government regulation.

Today, Price would probably be looking abroad to find a haven of free market capitalism or buying some shares in companies and industries far removed from the bailout effort. It's possible he'd miss a big payday on the banks that untangle themselves from TARP and lead a future recovery, but you have to wonder if the potential payout will ever match the risks.

As we've seen, when politics attempts to run the economy, the risks of serious mistakes and unintentional consequences are high. (To learn more about government economics, check out Is The U.S. Government Too Big To Fail?)




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