Friday, November 14, 2008

Contagious nationalism

There are some very important risks going forward with regards to the Governments "expanded" role in the private sector. The realization that a team of central planners cannot hope to allocate scare resources efficiently, be they high priest of the FED or otherwise, has been totally lost. The Government must appear to be doing something...there will be plenty of parties to blame and have justice department/attorney general/FBI/SEC, etc. pursue and prosecute once their prescriptions fail.

So, here is a brief list of the "meta" (whatever that means) risks involved:

1. Informational risks - this broad category encapsulates risks involving inefficient transfer of information (which, dear reader, is the reason detre' of prices) which will cause mis-allocation of resources.

2. Expansion of executable authority by Governmental powers. This category includes nationalization of pension funds, both public and private, individual retirement funds, here-to-fore tax free investment accounts, etc. This is extremely dangerous for any republic (see Argentina). This of course need not be so as Government can spend what it wishes without regard to revenue constraints. A large fiscal package is the only remedy that has a chance of working.

3. Emphasis on populist notions of "class warfare" and "protectionism". This list of governments who have resorted to these out-dated notions is not an enviable one.

4. Global competition. I am deeply skeptical of the "cooperation" that G20 powers and have pledged to each other and their corresponding constituents. The volatility will create opportunities for countries to break with the system (either overtly, or more likely than not covertly). Paraphrasing one of my professors (warning, pompous reference ahead) at "Chicago Booth": "if the benefit of cooperation is less than the cost of cooperation, cooperation will be avoided". Countries will break ranks to attract capital.

It is clear the Fed and the Treasury are severely "challenged" by the credit crisis, as the soup-line of institutions lining up for TARP funds grows daily.

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