Politicians Use Bailout to Grab More Power

There was a time I wrote extensively about promising sectors and stocks. I looked at companies' new products, analyzed earnings and tracked moving averages of securities big and small. I miss those days.

In recent weeks, those fundamentals have all but ceased to matter now that politicians are pulling the economy's strings. From restricting trade, such as through the short-sale ban that was just extended, to outright seizure, as was the case with AIG (AIG), we are witnessing the biggest expansion in government power since the New Deal.

Power is precisely what the "bailout" bill, which cleared the Senate Wednesday night, is ultimately about. Uncle Sam wants even greater control over the economy, your money and your life.

When Warren Buffett takes multibillion-dollar stakes in General Electric (GE) and Goldman Sachs (GS), he does so voluntarily and with full knowledge he might lose money in the process. Witness the substantial loss incurred by private equity fund TPG after it invested $1.35 billion into Washington Mutual at $8.75 a share, a trade that has now become virtually worthless.

Whatever securities Treasury Secretary Hank Paulson or his successor choose to purchase, whatever prices they choose to pay, they'll be made with taxpayer dollars but without taxpayer consent. In permitting him to do so, our government is taking an enormous leap of faith, assuming that bureaucrats in Washington are better investors than the individuals and corporations who, unlike Sen. Chris Dodd (D., Conn.), Sen. Mitch McConnell (R., Ky.) or even Secretary Paulson, actually do this for a living.

Suddenly control of those assets, and indeed an even bigger swath of the American economy, is no longer dispersed among millions of individuals making decision based on their own best interests, but centralized in the nation's capital, and being managed by those without a direct economic interest in the game. And while you can trade any stock or bond in your portfolio at will, when the government’s investments in subprime mortgages or Bear Stearns doesn’t turn out, it's the taxpayer who eats the cost.

Their goals are vague and undefined. Republicans stress that, by buying "toxic" paper, the Treasury can cleanse the system and might make a profit when credit markets improve. Democrats point out the government will be able to modify the terms of purchased loans, ideally giving stretched homeowners a better chance of staying out of foreclosure. Both point to the need for government action to "calm the markets."

But as I've pointed out repeatedly over the past few weeks, what has caused the market's volatility isn’t the lack of government action, but fear of it. After all, it's the short-sided, pragmatic rush to pass a bill -- any bill -- that spawned Sarbanes-Oxley and the Patriot Act. And while there's no way of precisely knowing the economic fallout of not passing the bill, the unintended consequences of such a draconian scheme are equally unimaginable. Every move the government makes, from banning short-sales to offering to insure money-market mutual funds, affects trillions of dollars of private capital in unfathomable ways.

Of course, those are just the grand plans. Included in the "Emergency Economic Stabilization Act of 2008" are tax earmarks (read: breaks) for children's toys, energy-efficient dishwashers, Indian tribes, auto racing tracks and (wait for it) wool research. (See Sec. 325 if you don't believe me about the wool.)

Government efforts to stabilize the market have only distorted it, making traditional analysis virtually impossible. Beyond buying some shares of Japan's NTT DoCoMo (DCM) and making a few currency trades, I’ve allocated virtually no new capital in recent weeks. How can I or anyone else invest for the long term when the rules are being rewritten on seemingly a daily basis?

It's not the proper role of government to prop up stocks, housing or any other market. Yet like the vaudeville performer on the old Ed Sullivan show, politicians now see their duty as to keep the plates spinning just a few more months, maintaining constituents in their homes and jobs at least until after the elections, without any thought to the long-term cost being paid to do so.

Who deserves a bailout? Nobody. Not white-shoe investment bankers in Mercedes SLKs nor unwed pregnant teenagers missing payments on their subprime loans. Most Americans understand this.

What Americans don't get, however, is that the goal of the bill isn’t to help Wall Street or Main Street, but to centralize power in Washington. Not surprisingly, that's where its biggest proponents just happen to reside.