As the government commits more and more money to its multitudinous rescue efforts--of Bear Stearns, then AIG , then Citigroup and its bank rivals, then Citigroup again, and now more money for Fannie Mae and Freddie Mac --we wonder: Where, oh where, will these bailouts end? In Detroit, with General Motors , Ford and Chrysler securing their desperately needed billions? Alas, the road to shore up capitalism will probably reach way beyond Michigan.
"I think this year will be remembered as the beginning of the Age of Interventionism," writes Byron Wein, the chief investment strategist at Pequot Capital Management, in a commentary for Morgan Stanley clients. Wein, a very smart guy and former markets ace at Morgan Stanley, contends that the events of 2008 will reverberate for generations. And as for free markets being free from here on, no way. "In looking at the 10 sectors of the S&P 500, only consumer staples, basic materials, industrials and technology appear able to move forward without the federal government playing more than a normal regulatory function," Wein writes. "Financial services, utilities, telecommunications, energy, health care, and consumer durables, representing close to 60% of market capitalization, will have a major government presence, in my view."
All of this, Wein says, is likely to have major implications for executive pay, labor practices, dividends, earnings, and stock valuations. Moreover, the federal government will have to recruit administrative people to help oversee the companies that it backs. "What kind of people will take these jobs and what does the resultant expansion of bureaucracy mean to the cost of government? What is certain is that for many sectors of the U.S. economy, it will not be business as usual."
As for the banking-industry, well, I was talking yesterday with a Fortune 500 CFO, and when I asked him if he believes that the government will end up spending more than currently planned to rescue troubled banks, he said he wasn't sure. But one key metric to watch, he said, is the unemployment rate: If unemployment is in the 7.5% range next year, more federal money will likely not be needed for bank rescues. If unemployment heads toward 10%, that's another story.
For what it's worth, Wein believes that "something north of 8% is probable" for unemployment. He advocates stemming the rise by putting people to work on infrastructure and alternative energy projects. We certainly need something like that to carry us out of the downturn. In the 1980s, the lift came from a decline in interest rates from 15% to 5%; in the 1990s, it was the Internet and the tech boom; this decade, until the chaos, it was housing, emerging markets and consumer spending. The idea that relief may come next from rebuilding America, literally, is at least encouraging. Give thanks and enjoy the holiday.