Hardly a day goes by without an announcement of another bailout, “facility,” stimulus program or similar nonsense. I do believe that the high priests are sincere in their stated desire to put the economy back into growth, and that their actions are not part of some malign conspiracy to plunge the world into as deep an economic hole as possible. However, my willingness to hold that belief is becoming increasingly strained as they continue to do the same things that caused these problems in the first place.

We need adjustments in the real economy. We have overcapacity in financial services, the result of years of excess credit creation. We have overcapacity in both residential and commercial real estate: too many houses, too much retail and office space, the result of widespread speculation. We have overcapacity in all kinds of consumer goods, including autos, the result of years of overconsumption. These adjustments will happen, regardless of the prayers of the high priests. But the high priests can continue to delay them, at the price of making the overcapacity worse. This overcapacity, or malinvestment as Austrian economics calls it, is a misallocation of people and capital, and is a direct and proximate result of the high priests’ interference in the economy.

Many people are calling the present economic difficulty a failure of capitalism. It is nothing of the sort, it is a failure of government. Albert Einstein said that insanity is doing the same thing over and over again and expecting different results. By that standard, the government is insane. Supporting evidence is the continuous flow of new schemes, demonstrating the lack of any plan, strategy or underlying rationale.

Reduce consumption, increase investment. We don’t need more credit for “everyday purchases,” as Mr Paulson promised this morning.

Millions of Americans cannot find affordable financing for their basic credit needs,” Paulson said. “And credit card rates are climbing, making it more expensive for families to finance everyday purchases.”

It is a sick society where consumers are running up their credit card balances to pay for their everyday purchases. Question: What do you do when you realize you are in a hole you can’t climb out of? Answer: First, stop digging!

The 1930s depression was named the Great Depression to distinguish it from the Long Depression, otherwise known as the Panic of 1873. Scott Reynolds Nelson, a professor of history at the College of William and Mary, makes a case that it is a better model for our current situation.

The crash came in Central Europe in May 1873, as it became clear that the region’s assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.

Mr Bernanke admitted that he was wrong.

“I and others were mistaken early on in saying that the subprime crisis would be contained,” Bernanke said in an article in the Dec. 1 issue of The New Yorker magazine.

“The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict,” he said in the piece titled “Anatomy of a Meltdown.”

Mr Bernanke, it wasn’t complex at all. Please, not only were you wrong, which might be forgivable, you are wrong about why you were wrong. That is not forgivable, because it means you are not able to learn from your mistake. The problem is that the economic model in which you believe is fatally flawed.

Retract too early/Make prop curly/You’ve gotta wait/For positive rate. Usually accompanied by a cartoon sketch of a bent propeller, posted on the bulletin board in pilots’ lounges.

I went long too early, clearly. I thought the values were compelling – and they were, and are. Fortunately, the drawdown is not serious and I added to my positions at even lower prices. Friday’s rally was encouraging, but we have had these before and they have quickly reversed. If that happens, I will hedge my positions. But the yields on the income trusts are just staggering, over 25%. I know energy prices are down, but these companies have hedged much of their output through 2009.

I even bought some bank shares on Friday – Scotiabank, one of the large Canadian banks and an old employer of mine, priced at half of their price a couple of months ago. A good company in what is now rated as the safest banking system in the world.

However, I am amazed at the lack of reaction from the public. Perhaps people are just stunned, or in denial. But everything seems business as usual. Fidelity Magellan, the mutual fund I use as a benchmark, is down 58% year-to-date. It is a large fund and should be pretty representative of the performance people are seeing from stocks and mutual funds. But there’s no sign of panic, really. I find this a little spooky. If my portfolio were down that much I would be having panic attacks, I think.

The messages that people need to take away are:

• Stocks may offer higher returns, but only at the price of much higher volatility and when bought right. You have to buy them at low valuations. Buying over-valued stocks is a recipe for trouble, even if your time horizon is long.
• Mutual funds and investment advisers who don’t provide some form of market timing are a joke, the fees they charge are just money down a rathole. A lot of money, too, in many cases. And even worse, thinking that they know anything you don’t gives a false sense of security.
• Wall Street is your enemy. It makes vast profits at your expense, not by being smart but by being in a position of information advantage. It knows its clients’ positions and intentions and exploits that knowledge for its own gain.
• Most advisers are incompetent. They drink the Wall Street and CNBC Kool-Aid and pass it on to their clients. In the event of my being unable to manage our investments for whatever reason, my instructions to my wife are to put the money into Hussman Funds. There’s a guy (John Hussman) who provides value for his fees.

Anyway, at some point the short-covering in the US dollar will be over, and the dollar will resume its decline, boosting energy and the other commodities (to say nothing of the Canadian dollar). And my portfolio, hopefully. But we’ll see. There’s no crystal ball, I just look at conditions and try to position accordingly.

The Detroit auto companies – GM, Ford and Chrysler – are running out of cash because they are losing money. They are losing money because they are selling fewer cars and their union contracts do not allow them to reduce their payroll. The companies therefore have their hand out for taxpayer money to cover their losses, in effect to fund their costly contractual obligations to their union employees. There is no prospect that the handouts from the taxpayer would ever end, since the main hope of the companies is that the union-supported Democratic party will want to curry favor with the UAW.

The main theme of the bailout proponents is to blame the respective management teams, ignoring the role of the UAW leadership. In fact, considering their cost structure, the management teams should be given great credit for surviving this long. Their major competitors have much lower costs, and therefore have been able to invest more in R&D and productivity technology, improving the product and driving costs even lower. However, this advantage is so powerful that even with the best leadership, there is no hope of these companies being competitive. Their costs must be reduced. They cannot pay 50% more than their competitors – in, for example, Alabama – and survive. Thse management teams are not without blame, but they are the victims of a powerful union and the Sherman Act, which allows unions, but not companies, to price-fix across whole industries. Even union-friendly Germany, for example, allows companies to negotiate collectively on an industry-wide basis so that selective targeting can’t be employed, as it has been by the UAW. Better would be to allow neither, but the system we have is the worst of all possible and encourages the systematic destruction of industries. That’s why union participation continues to fall, because the unionized industries fade away, and only remains strong in the public sector where the unions have monopoly rents to support them.

This means these companies must be permitted to go bankrupt and restructure their labor agreements. The government can allow these companies to continue to operate by providing financing in bankruptcy, so-called debtor-in-possession (DIP) financing, which would probably not be available to these companies otherwise.

Without lower costs, failure is certain. The prospect of nationalized car companies subsidized for years by taxpayers to provide highly paid union jobs to a select few, producing cars that no-one wants, will not fly. The Soviets tried this.

Edit: Best question asked by a Congressman at the auto hearings,  “Please hold up your hands if you flew to this hearing on a commercial flight, rather than your personal jets?”  No hands were raised.