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September 12, 2018

REMINDER: Don’t Be Fooled, There Was Nothing ‘Financial’ About the 2008 Crisis.

Lehman’s bankruptcy didn’t cause a “crisis” as much as the Bush administration’s foolish decision to bail out Bear Stearns months before created the perception in the marketplace that Lehman would be saved too. As such, investors weren’t prepared for the correct decision to let Lehman go. Put simply, Lehman was only earth-shaking insofar as prior government intervention turned what was healthy into a surprise. And having erred mightily in bailing out Bear, the Bush administration chose to make a bad situation much worse.

Indeed, in conjunction with the SEC it banned short-selling on 900 different financial stocks. Talk about pouring gasoline onto the fire. Seemingly missed by Administration officials is that short sellers are ultimately buyers. When short sellers are able to express their pessimism in the marketplace, a huge reserve of buying power is created when we remember that shorts can only take profits insofar as they buy back the shares sold short. Yet when the markets needed them most as both price givers and liquidity providers, the Bushies banned them.

After that, bailouts are not free. Governments don’t mis-allocate the money of others only to walk away. They offer up the money of others only to demand a more muscular role in how the saved operate. Ok, but the 20th century was a monument to the failure of central planning. Is it any wonder that future-seeing investors looked negatively on a return of excessive government intervention in commerce?

What can’t be stressed enough about what happened in 2008 is that for economies to grow and markets to rise, it’s necessary that the mediocre and lousy constantly be replaced by the good and brilliant.

No. More. Bailouts.