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Tuesday, September 16, 2008
The line in the sand?

The Fed made the right call in letting Lehman fail and forcing the Merrill deal to be totally private - that was their theoretical "line in the sand." They backed that up today in my view by leaving the Fed Funds rate unchanged in the face of calls for .25 or even .5 point cuts. The dollars in your pocket are worth more right now because of it - that show of strength. The next test of their will is to let nature take its course with AIG. If AIG can put a private deal together than they should do so - if they can't, then so be it...

Well, so it seems now we own AIG. Cost us $85B. Asian markets are rallying on the news, and Europe will likely follow in a few hours.

I can't say I think it was the right thing to do - the moral hazard has never been so acute - "to big to fail" is bad policy for a free market. If I was CEO of a major corporation, that would be my new goal - my new target, we must become "to big to fail." That essentially incentives reckless investment, "creative" accounting, and slash and burn financial growth strategies.

The line in the sand lasted about 48 hours. Now the Fed will have to decide exactly who is "to big to fail." Washington Mutual? Wachovia? Goldman or Morgan Stanley? The automakers? The airlines? I generally have disdain for slippery slope arguments, but damn if we're not on one now...
Ask Mr. Treasury Sec. former Goldman Sachs Paulsen about when they finally realized that the financials were in trouble?
Sort of off topic but I was curious to what you guys think of Obama's economic plan. This is from one of his new ads:

--"Reform our tax system to give a $1,000 tax break to the middle class instead of showering more on oil companies and corporations that outsource our jobs. End the ‘anything goes’ culture on Wall Street with real regulation that protects your investments and pensions. Fast track a plan for energy ‘made-in-America’ that will free us from our dependence on mid-east oil in 10 years and put millions of Americans to work. Crack down on lobbyists – once and for all — so their back-room deal-making no longer drowns out the voices of the middle class and undermines our common interests as Americans. And yes, bring a responsible end to this war in Iraq so we stop spending billions each month rebuilding their country when we should be rebuilding ours."--
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