Fratto: Jawboning Investors To Buy Won't Work
I can't argue with President Obama's investment advice — a long-term strategy of investing is always wise, and confidence in the future is an important element of any recovery — but jawboning investors to buy won't fix what's ailing this market.
Federal financial rescue efforts to date have been hobbled by populist shackles, making nearly unachievable the priority goals of resuscitating the banking system and stabilizing financial markets.
In the current environment, market participants have now made two determinations:
(1) The government is far more interested in revenge on Wall Street than fixing problems; and
(2) Getting out of the market is smarter than waiting for Washington to act with clarity and predictability.
Fear and uncertainty are now so entrenched in markets that all Washington announcements are met with rational skepticism, if not outright head-scratching. Market participants are overwhelmingly bewildered by the changing rules of the game.
Here's what we all need to accept: the financial crisis is ugly, and only ugly solutions will work.
That means that efforts to try to make the solutions politically palatable — like inflicting pain on Wall Street executives, and trying to guarantee a return on taxpayer "investments" — only add to uncertainty and diminish the effectiveness of these programs.
Congress and the White House need to sheath the long knives for Wall Street executives and understand that it may be necessary to lose some of the taxpayer's investments in the short-term in order to restore health to the banking system over the long-run. There's no way to make these policy responses pretty.
Unless we move outside the populist box, efforts like the public-private plan to purchase assets is doomed to failure.
The only way for the public-private effort to work is if the government overpays for assets and taxpayers guarantee against losses — making participation by the private sector a one-way bet on the upside. It's hard to see how this "reward" for the private sector is possible in the current populist political environment. Who wants to receive that GAO report accounting for the Wall Street windfall in such a program?
And financial institutions view getting into bed with the Treasury Department today as an act of unsafe sex—the intrusiveness, onerous and damaging compensation restrictions, demonizing rhetoric, and rule changes are like picking up the business world equivalent of a sexually-transmitted disease.
Why should a hedge fund participate in TALF or asset purchase programs if Congress and the White House are fixated on regulating them out of business?
Until there's more clarity and direction on policy from Washington, jawboning won't do the trick.
Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.