Too big to fail. No, I am not talking about Fannie Mae and Freddie Mac; nor do I mean Washington Mutual (in the interests of full disclosure, TCI does not recommend investing in those stocks even at these distressed levels).

What is too big to fail is the U.S. economy. It’s getting weaker by the day as a result of hurricane-force winds of dual crises: financial and energy.

The Federal Reserve and the Treasury Department have decided to all but bail out the mortgage giants Freddie and Fannie, steps they would never have taken had not their possible collapse further endanger our very fragile economy. These steps have been deemed unprecedented, but were they really that unthinkable after the March bailout of Bear Stearns? The markets cheered today’s action for all of about 10 minutes before rethinking the move. Investors then spent the rest of the day bailing out of any financials with exposure to the mortgage market.

One simple and direct measure regulators can take to prevent widespread panic would be to raise the amount of bank deposits covered under FDIC insurance.

If the right steps are taken, and when financial panic recedes, this market will be ripe with buying opportunities. In the meantime, the rest of the economy is in the better shape than the financials. The task the Fed has on its hands is to prevent the ailing financials from taking the economy down with them. We think the Fed can still prevent the slide.Read more...