U.S. government efforts to revive a sluggish economy have cheered markets since March, but some of the most successful investors around worry these moves may only make the bad times linger.
Several hedge fund managers at an investment conference this week warned that a number of policy moves by the Obama administration, from its Chrysler intervention to Treasury's myriad bank bailouts, will only extend the recession.
It would be better, they said, if the government let markets move unimpeded, causing pain now but clearing a path for sustainable recovery.
The basic strategy appears to be to try to bring us back to 2006 by propping up asset prices and reflating the popped credit bubble, subsidizing bank creditors and shareholders, and delaying needed bank recapitalizations while hoping for an economic recovery, Greenlight Capital's David Einhorn said at the annual Ira Sohn Investment Research Conference.
Wall Street has been pilloried during the past year for making big gains as markets crumbled, and blamed for driving companies into the ground and accused of standing in the way of the recovery. U.S. President Barack Obama last month chastised several hedge funds as speculators when they declined to support his Chrysler restructuring plan.
The scolding prompted these fund managers to surrender, but the episode made investors less certain about the security of their interests.
It is a very bad idea for governments to create arbitrary and unfair outcomes, or outcomes resulting from the passions and whims of the government rather than from the law, just because they have the power to do so, said Paul Singer of hedge fund Elliott Management.
MidAmerican Energy Chairman David Sokol, who runs a utility that also owns the second-largest U.S. real estate brokerage, said short-term fixes could came back to haunt the U.S. economy.
Government intervention could draw this out much further than is necessary and is useful, although for some areas it may feel somewhat good in the interim, said Sokol, a contender to succeed Warren Buffett as head of Berkshire Hathaway Inc.
Several of the Ira Sohn speakers warned massive government spending today could lead to rampant inflation.
Peter Schiff of Euro Pacific Capital, who in 2006 publicly warned the subprime crisis would drag down financial markets, said Obama's policies will only re-inflate the credit bubble.
As any drug addict knows, if you stop using drugs you will go through withdrawal. Government is making the situation worse, said Schiff. We don't need any more stimulus. We are suffering from the stimulus we have already been given.
He joked years of misguided U.S. fiscal policy has created a Ponzi economy, where new Treasury bonds must be sold to repay existing investors just to keep Uncle Sam solvent.
I don't know why we have Bernie Madoff in jail, Schiff said. We should appoint him secretary of the Treasury.
Einhorn observed the U.S. budget deficit has grown to 13 percent of GDP, not including the trillions of dollars of potential losses guaranteed under the government's bailout plans. Long-dated U.S. bonds, he said, are already anticipating higher rates inflation
When it comes to bolstering banks, though, the Obama administration may be doing too little.
Einhorn, who correctly predicted Lehman Brothers needed a lot more capital to cover real estate losses, this week said U.S. banks are undercapitalized even after raising $75 billion of equity following the so-called stress test.
The government should induce investors to swap debt for equity and push banks to recognize their losses on mortgages and other debts, he said. Yet these measures would generate losses and the government has not forced the issue.
The Obama administration disappointingly seems to be following the same path as the Bush administration, he said.
(Additional reporting by Herbert Lash)