Healthy Intervention versus Fiscal Imprudence

August 21, 2007 |

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So the Fed lowered the enigmatic “Discount Rate”, in an effort to provide liquidity into a floundering system.  I hate to say it, but doesn’t this send a bad message to all market participants along the lines of: “Don’t worry about it.  Keep chasing risky assets and compressing spreads to unreasonable tights.  If we have a hiccup, the Fed will bail us out!”  Not quite the story that I grew up with.  When I pumped my entire week’s stipend into the video machines and then went to the bank (i.e., my father) for a loan for necessities I was told to get lost, suck it up, and stop wasting my money.  A valuable lesson that I’m sure is not lost on the majority of my fellow investors. 

How about the multi-billion dollar injections by investors including Citadel, Goldman Sachs, Eli Broad, and the like?  This sort of intervention I find much more palatable and healthy for the long-term viability and fiscal plumbing of our system.  Rather than the Fed providing a cheap safety net to continue feeding the borrowing machine, the hedge fund saviors are saying: “Sure, we’ll bail you out, but at a painful discount that will make you think twice before getting into this same predicament again”.  Food for thought for the Fed, SEC and other governmental types that scrutinize hedge funds: Take a closer look; hedge funds will again save the day in a fashion more akin to the tradition of America’s great free market system.

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