Thursday, January 08, 2009

Bank Bailout Return on Investment



The above chart is from John Mauldin (Investorinsight.com) showing the investment made by the Federal government in the top 10 financial companies. Note that AIG has received well over $100 billion and has a market value of $18 billion. That is a pretty bad return on investment by anyone's standards. An additional $250 billion has been spent by the treasury propping up companies with market caps totaling about $20 billion. Again, poor return on investment.

This is what happens when you have a government, with no incentive to allocate resources efficiently, with no accountability, with no standard rules on investment because it is not a company, try to become a private equity firm. All the rules of finance have been destroyed. Business is now a game of political connections rather than merit. Markets have rewarded interventionists with increased volatility because of the uncertainty that goes along with random bailouts of nearly every industry and the impending bailouts of municipal and state debt.

These "investments" are going to be a mountain of trash that will be inflated (probably sooner than later) away over time, because that is the only way for banks, including the Federal Reserve, to continue their existence. That spells bad news for the citizen/slaves of the country. We will be loaded with debt, paying off banks for the rest of our lives unless we decide to just not pay it and let the government default on their own gluttony. Sure it will be painful, but we have been pushing it off for years saying it would be painful. Now we are feeling the pain that we pushed off for years. So we need to ask the question: Do we want to take a short painful route and start the road to recovery or do we want to slowly unwind the credit debacle and let this stressful period last another 10 years? I choose the short one.

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