Another week, another government bailout announcement, and another push-me, pull-you week on Wall Street. Last Thursday, of course, was especially dramatic, with all the major indices vaulting to infinity -- and beyond. Not so much on Monday, however, and as of yesterday's close, the Dow was down more than 500 points since last week's pop.
What to make of the market's latest head fake? Well, for starters, at this point Webster's may have to redefine "capitalism." Even USA TODAY -- America's newspaper, judging from the thousands of crumpled copies that can currently be found in airline waiting areas everywhere -- has weighed in with a riposte to bailout fever.
In last Friday's edition, a sardonic headline writer summed up the accompanying article this way: "U.S. bends the rules of free markets." Three paragraphs in, after a review of the "tough love" stance we've taken in relation to other countries' economic meltdowns, a California State University economist puts it succinctly: "We're not doing what we preached."
You can say that again!
Setting aside, for a moment, any consideration of the financial tsunami we'd likely face without the miles of safety net Uncle Sam keeps unfurling, that econ prof has it exactly right.
The government's actions are dubious on at least two fronts. (1) They invite "moral hazard" by signaling to reckless risk-takers that U.S. taxpayers will pick up the tab for their bad bets. (2) What's next? With each bailout, the government's money men further erode their credibility, diminishing the ability of their Green Lantern-esque power rings to ward off impending financial disaster with yet another blast of cash.
In other, pop-culture words -- and to quote the ever-quotable Elvis Costello -- "How many times can you jump out of the cupboard / Before someone gets suspicious / Or someone gets discovered?"
Dukes of Moral Hazard
That said, I'm no moral-hazard purist. Indeed, when the likes of Berkshire Hathaway
On the topic of Freddie and Fannie, for instance, Buffett recently opined, "The government really had no choice. For years, they have encouraged the belief that there is an implicit guarantee behind Freddie and Fannie’s guarantee of mortgage instruments.”
Gross was, as ever, colorful in his own reaction: "Investors are saying, 'We want to see [the Treasury] in there with us.'" He argued that the Treasury will have to "swim in the pool, not just be a lifeguard."
So given the market turmoil that's emanating from the meltdowns, bailouts, and turnovers, what, pray tell, are these two mavens investing in?
Aside from the just-announced investment in Goldman Sachs, which will give Berkshire a substantial stake in the company if it exercises stock warrants, Berkshire has also recently made a $4 billion investment in Dow Chemical
At the end of June, Berkshire's stock stake found dyed-in-the-wool blue chip General Electric
As for Gross, at the end of June, Total Return held a significant stake in debt issued by Fannie Mae
Follow the leaders?
Money managers like these have made their reputations the hard way -- they’ve earned them -- and while, as every prospectus fan knows, past performance is no guarantee of future success, savvy types have to like their chances. I know I do.
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Shannon Zimmerman runs point on Ready-Made Millionaire and owns shares of Fannie Mae, but none of the other securities mentioned above. American Express, CarMax, and Berkshire Hathaway are Motley Fool Inside Value recommendations. Dow is an Income Investor choice. Berkshire Hathaway is also a Stock Advisor choice. The Motley Fool owns shares of American Express and Berkshire Hathaway. You can check out the Fool's strict disclosure policy by clicking right here.