Yes, you heard it. Treasury Secretary Hank Paulson is rushing out a plan to insure money market funds.

“Huh? Wait a second,” you say. “You can’t…. ”

That’s right. Why the government is bailing out mutual funds is beyond all logic. Here’s why. Money market funds are where you place your money in a bank if you allow the bank to use it in investment in market play. They usually provide these funds with a better percentage return than your comparable savings account but the big risk that you take is that it’s not FDIC insured. This is due to the fact that FDIC has certain rules and regulations on what the money can be used for in savings accounts and how much the bank has to hold onto whereas non-insured money can go “kaput”.

So why are they insuring it the next year? Because of all this Armageddon talk and how it’s the Great Depression again. A lot of negative buzz words if you ask me. I’m not an economics professor or expert by any means, but comparing now with 1929 is extremely coarse logic at best in my opinion. These days, financials are very much dependent on the global economy and the borrowing and lending on the global scale. If anything, globalism prevents these types of catastrophes from happening unless the entire global economy falls prey to itself. That’s actually a possibility also, but with as many variables in play as it is, it would be one of those statistical anomalies. Also in play is the general evolutionary timeline for any corporate environment. Corporations live and die by how they adapt to the current environment. My favorite example is DEC. Anyone remember it from the 1990s? They were one of the biggest technology firms around. Yet, not one mention of them these days due to non-adaptive management.

So why should we bail out the same investors? In every money market fund I’ve ever invested in, it’s in black and white that it’s not insured. You take the same risk just as you do with stocks, except you’re hoping that the bank portfolio managers know how to invest better than yourself. That’s the difference, just as it is with mutual funds. You never get a better percentage in investments for nothing. There’s always collateral. Always something. What are those famous words your daddy told you when you were little? Oh yes. “There’s no free lunch.”

So why is it that there’s a “free lunch” going around here? So why are these financial institutions and investment firms getting “get out of jail free” cards for making bad decisions is all but a political move to save people from themselves instead of actually forcing people to learn from their mistakes? Think of the parent that keeps interfering with the learning of a child because it’s not “safe”. Will the child ever learn to quit making errors? Of course not. Why would you when you have a safety net?

And all the while, those that understand just a little bit about how money works gawk at the fact that again they’ll be forced to pay for other people’s mistakes through taxation. It’s no wonder that other countries hesitate at loaning money back which drives us further into a hole. We dug ourselves in. It’s time that we quit digging ourselves deeper.

Photo Credit: (rutty)

What’s interesting here is that there two corporations are not in the same boat as Bear Stearns (BSC: 6.18 0.00%) which was definitely going to financial ruin. Both Fannie and Freddie seem to have decent cash funds and their concerns for a federal bailout are more dealing with how much it’s hurting their area of the market. It’s actually very strange that even with the news that the feds were willing to lend and buy equity in the firms, that it didn’t alleviate the pain.

What’s more disconcerting is how much the Asian banking sector took the hit. Unless these banks have a lot of investment in US properties and these particular firms, I don’t see why they would be suffering on a whole across the board.

Overall, the financial sector has been kissing the floor in the last few months due to the American mortgage crisis and this mop isn’t done cleaning yet it seems.

Photo Credit: (merfam)

There are a lot of things that are contributing to this, but speaking that we’ll be out in a year or two as the fed has said, is severely optimistic. With the ARM fiasco that has taken its hit on the financial markets, that just helped make the numbers more apparent. In fact, there are still indicators that this is here to stay for a while.

The war in Iraq and Afghanistan has been eating away at our national funds. Being that it’s not directly effecting our pocketbooks as a place we can actually feel and touch, many consumers don’t really think of it as a direct correlation. But that’s not all. The food shortages world-wide due to increased transportation cost, which in-turn is being driven by oil prices? With barrels reaching $120USD a barrel as of writing, it’s a wonder there aren’t more theories that oil corporations aren’t puppeteering this entire economic downturn while they just keep raking in the green.

Even Warren Buffett believes that we’re in it for the long haul. And the charts don’t lie. Two quarters with a falling GDP indicates that it might be time for everyone to bunker down. We’ve all gotten through this before, but I wouldn’t doubt that it would last at least twice the time that the feds think it’ll take.