Just stop and reflect on what the government has done, even in the last few weeks. It has literally seized (the press’ word, not mine) companies tied to trillions of dollars in assets. Furthermore, these seizures were truly a "hostile takeover." For example, the common shareholders of Fannie and Freddie were quite simply robbed. The government came in and assured injections of capital to keep the firms afloat. In exchange, it acquired "senior preferred equity" shares, placing it higher on the totem pole vis-à-vis the original preferred equity shareholders, in the case of losses. However, if the real estate market turns around and the share prices of Fannie and Freddie start rising, then the government will exercise its warrants giving it ownership of 79.9% of the common stock. (Note how people are speculating that the government might make money on the deal.) Before, shareholders of Fannie and Freddie knew they were probably going to lose everything, but there was still a sliver of hope. Now there is no hope.

And yet, there is no rhyme or reason to the government’s decisions. Lehman Brothers was allowed to fail. In essence, you’ve got a massive beast stalking the financial markets. This creature has many trillions of dollars ultimately at its disposal, and oh yes, I should add: It is not afraid to send armed men to your house if you should ever really cross it. In this environment, is it any wonder that the credit markets are "frozen"? When the SWAT team bursts into your kitchen window, you freeze up, right? Why should things be so different on Wall Street?

# posted by Bob Murphy @ 1:39 AM