Government Can’t Prevent the Next Financial Diaster – Here’s Why

"Even as I write these words, the world’s largest economy — the E.U. — is coming unglued at the seams, the world’s second largest — the U.S. — is careening headlong toward a fiscal cliff that promises to gut its GDP, nearly all of Asia — including Japan, China and India — is slowing…and yet most investors still don’t get the message.

Investors are continuing to:

• invest as if nothing has changed
• take risks that, in prior eras, would have been deemed wildly imprudent
• hold massive sums in banks that are akin to gambling casinos and even when they DO rush to safety, they often jump from the frying pan into the fire,
• buy the bonds of some of the most fiscally bankrupt governments on earth.

Why? There can only be one possible explanation for this pathological complacency – die-hard faith in the supposedly “limitless power” of government to prevent financial disasters.
The origins of the complacency are not hard to see:

• every time a major financial disaster has struck in recent years, Big Government has swooped down like Superman to supposedly rescue the victims and,
• every time global financial markets have come to the brink of a total meltdown, Big Government has pulled them back from the abyss.

It’s only natural for investors to sit back in a state of semi-eternal bliss, assuming governments will continue to do the same, but there are three major flaws in that assumption:
Flaw #1: Governments rarely prevent financial collapses — they almost invariably intervene only AFTER the collapse has struck.
History proves that it’s only at an advanced stage of the crisis that governments can gather the political and financial capital to respond. Result: By the time the official rescue squad finally reaches the scene of the disaster, countless investors are already buried under the rubble.
Flaw #2: Almost invariably, the government’s priority is to bail out bond investors and other creditors. Stock investors are last in line. Even when the rescues are “successful,” they often wind up with little more than pennies on the dollar.
Flaw #3 — the biggest of all: For the first time in modern history, governments themselves are in need of the giant bailouts. Needless to say, this raises serious doubts about their future ability to rescue bankrupt banks, insurance companies or industrial conglomerates. This is not just a theory about the future. It’s a very practical matter facing local, state and federal government all over the world — insufficient funds!..."

at  http://www.munknee.com/2012/06/government-cant-prevent-the-next-financial-diaster-heres-why/