What's next, a ban on stock sales?

Security says, 'Remove your shoes -- and your shorts'

Nonetheless, despite any and all facts to the contrary, the SEC and the government have resolved to pursue their idiotic "solution" in terms of banning short-selling of certain stocks for the time being. They also have demonstrated that rules don't mean anything, because they are willing to change them whenever it suits their purposes, no matter how disruptive or foolhardy those changes may be.

A friend summed up the situation by commenting that we're in an environment where "short sellers . . . are risking private money betting against badly run businesses and governments are risking public money betting in favor of badly run businesses. You don't need a Ph.D. in finance to know which group of folks believe in truth and free markets. . . . You can expect to see all foreign banks move their toxic waste to their U.S. subsidiaries for delivery to Henry's Helpful Handouts."

One wouldn't have to be too cynical to conclude that we now know the real reason Treasury chief Hank Paulson decided he needed a $700 billion bazooka. I don't mind him helping out old friends at Goldman Sachs (GS, news, msgs), and I would prefer that the financial system not implode. But I find this bailout bill completely outrageous. Though I won't hold my breath, I hope it doesn't get enacted as currently proposed.

The silver lining: Halting a money-fund run

If I were to try to find the piece of last week's actions that was least objectionable, I would say it was putting a halt to the run on the money market funds. I know that places at a disadvantage all the people who prudently owned government-only paper, like many of my readers. But just as, when push came to shove, American International Group (AIG, news, msgs) had to be bailed out, a run on the money market funds would have been devastating to too many innocent bystanders.

The bottom line is that the government has decided it doesn't like where the prices of houses are, where the prices of mortgage-related debt securities are, where the prices of commodities are and where certain stock prices are, so it has elected to change them all by fiat. It won't work, and one of these days, the bond market will be absolutely shattered.

If Congress manages to agree on a bailout bill, the financial crisis will probably be over (but I'll reserve judgment until I see the action in all markets in the wake of the legislation).To that extent, the government's actions will keep the economy from getting "extra-worse" on the back of a stock market crash and a run on the money funds.

Having said that, when folks discover just how weak the economy is, especially now that we've blown out all kinds of participants in the stock market, we may still get some sort of a crash or serious sleigh ride south, though it's really hard to draw conclusions at the moment.

We obviously have been close to a crash in the stock market and a seizing up of the financial system. But regardless of what the "experts" say (most of them, after all, saw none of these problems coming), my fear is that the worst is still in front of us.

At the time of publication, Bill Fleckenstein was short shares of IBM.

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