Tuesday, January 6, 2009

Government Crowding Out Investment

Wilbur RossWilbur Ross, a famous investor best known for buying companies in distressed industries, proclaimed that he is looking to buy a bank.  He declared,
"We will end up with a bank, there is no doubt about that."   He goes on to state that he actually wanted to buy a bank sometime last year but the government's TARP plan put a hold on that.

Read that line again.  Because the government intervened, a private investor decided not to invest.  I actually blogged about this a few weeks ago when I talked about the unintended consequences the government was creating with its bailout plan.   And now here is proof that this is exactly what is going on.  Because the government is now in the business of investing in private institutions, private investors are holding back their own plans to do the same thing.  Can you blame them?  Government interaction does a number of things.

  • Makes equities more expensive because government is propping the company up

  • Subordinates your own investment since the government is mandating first rights to any liquidation

  • Makes it near impossible to really value companies because you are not sure what the government might do next

To make matters worse, the government is putting YOUR tax dollars at risk here when others were more than happy to take on the risk instead. I do not really care if someone like Wilbur Ross loses his shirt when a bank collapses. I care very much when my the government loses my tax dollars. Even if these "investments" pay off for the tax payer, I think the government was silly to take on the risk because it could just as easily go the other way.

Of course it is just going to get worse.  The government is going to start investing in more programs far more reaching than just the banking sector.  Will it crowd out private investors?  Of course it will.  The only real question is, by how much?

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