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Ride out Wall Street's hurricane

The real reasons we're in this mess – and how to clean it up.

By Mark Skousen / September 17, 2008

When hurricanes hit land, they generally weaken. Not so on Wall Street. Since the gigantic financial storm I call Hurricane Central hit a year ago, it has only grown in size and intensity. This week we saw how destructive its power had become.

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Even the mightiest oaks have fallen: Countrywide Financial, Bear Stearns, Fannie Mae, and Freddie Mac.

The latest victim, Lehman Brothers, resulted in the largest bankruptcy in history on Monday. Hurricane Central even toppled the "Bull" on Wall Street. Merrill Lynch, the country's No. 1 brokerage firm, was bought out by Bank of America in a fire sale. These are times that try investors' souls.

With the US and global economy slowing down, real estate still in a tailspin, and credit conditions tightening, Hurricane Central is traveling a wide path, wreaking havoc wherever it goes, and no one knows for sure where it will hit next. (Could it be the insurance companies?)

But one thing is near-certain: Hurricane Central's storm surge will flood Main Street. Aside from putting the economy into a tailspin, it could put taxpayers on the hook for billions in new liabilities and bailouts.

Despite unprecedented bailouts, tax rebates, record federal deficits, and easing of monetary policy, Washington's financial FEMA (known as the Federal Reserve) seems to be at a loss on how to tame it. One week, the markets appear to have stabilized, the next week, we see that we were only in the eye of the hurricane, and the destructive winds have come back with a vengeance.

What caused this dramatic typhoon, when will it end, and what should investors do to minimize their exposure?

Are greedy capitalists to blame?

Many pundits – and, sadly, most politicians and voters – blame it on the "inherent instability" and "animal spirits" of greedy capitalists stirring up the financial waters with their excessive speculation and leverage in enticing new but unregulated financial instruments, such as subprime ARMs (adjustable rate mortgages), CMOs (collateralized mortgage obligations) and CDOs (collateralized debt obligations).

More astute observers will examine the perverse role of Washington in destabilizing a fragile global financial economy. The evidence is growing that governments both here and abroad attempted to heat up the economy through easy money, beyond the natural capacity of technology, saving, and capital formation. Now we are witnessing the unintended and dangerous consequences of their contrived agenda.