Interesting quote today in a Bloomberg article on GE:

“Creditors are being bailed out everywhere but equity owners are not,” said William Poole, president of the St. Louis Federal Reserve Bank until March 2008. “What that does is create cascading weakness because you can’t raise any equity capital.”

This is of course the key problem for equities: No respect and a government that is intent on destroying equity whenever they can get their hands on it. This despite the fact that if we actually capitalized businesses with more equity, as opposed to credit, we would not have a major economic crisis ever few years. Greater equity financing is, for various reasons, much safer and would improve financial stability, as many economists, like the late Minsky have suggested.

Need proof of that? Consider the .com bubble, which was entirely an equity-based bubble. Yes the .com bubble caused a major market downturn, but the real economic contraction was actually minimal and the overall effects were very short-lived. Quite the opposite with the current credit crisis. The entire world economy has now been put at risk due to an overuse of credit financing.

So why the bailout of creditors and the continued drive towards maintaining the status quo of a predominantly credit-based financing for the economy? It’s simple: Greed.

There’s simply too much money to be made in the credit markets, given the ponzi-like nature of credit financing (i.e. “refinancing”, which is by definition a ponzi) with its myriad of credit derivatives. So when faced with the choice of an economic crisis every few years that undermines social well being or a more stable society with less economic volatility which promotes social harmony instead of wealth accumulation by a few, financial institutions and individuals (like Pimco, Bill Gross), that profit handsomely from these major financial dislocations, will always push for greater credit financing and financial instability.