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Washington Overreacts

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Warren Buffett likes to say: "The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs."

Have you noticed our politicians so often do exactly the wrong thing? They mean well, but in their haste to propitiate us, the voters, they cause more damage than good.

Since August, the Bush-Paulson team took over our biggest S&L, Washington Mutual, and largest insurance company, AIG. They nationalized Fannie and Freddie, bought stakes in dozens of banks and insurance companies, bailed out the auto companies and backstopped Bear Stearns with $29 billion so that JP Morgan Chase would agree to buy them. The government is nationalizing some banks, and lets others fail. Evidently there are no plans and no rules

President Bush's treasury department is trying to save home owners by buying troubled mortgages to the tunes of hundreds of billions, just like Herbert Hoover passed massive tariff increases thinking it would protect jobs, and raised taxes to avoid deficits.

They do not realize we are going to have a recession no matter what they do, and many times these panicked actions by Washington and its edacious appetite for more power only make things worse.

Or take oil. When oil was at $140 a barrel, so many people in Washington wanted to levy special taxes on the large oil companies. They assumed oil giants controlled prices, and profited at the expense of average Americans. But the price of oil has fallen by more than half in a few months. And oil companies are now stuck with the very expensive projects they started when oil prices were marching to the sky. They are trying to get oil out of sands in Canada and out of the ocean in remote locals, but those just turned into expensive projects with no hope of making money.

The oil giants were simply going with the flow of global supply and demand, just like the rest of us, having no control of prices and no sinister plans to rule the world or manipulate it. Nobody is talking of oil windfall taxes now. Again, it is better for Washington to do nothing.

But they have a new favorite culprit now. It is hedge funds. Those are supposedly controlling and manipulating prices, shorting stocks and decimating the economy. And people in Congress want to slap the industry with higher taxes and intense regulation.

Never mind that the hedge fund industry is suffering unprecedented losses, with perhaps as many as a third of funds closing. Never mind that many hedge funds are victimized by the decline of commodity prices. Never mind that some of the biggest industry leaders are vulnerable.

From personal experience I can attest that hedge funds managers are not as sinister nor as brilliant as they are portrayed in the media. When they were minting money, politicians wanted to regulate and tax them, and attributed huge power and tremendous savvy to the industry. Now that the tide has decidedly turned, hedge funds are stuck with overhead, redemptions and losses that make their high watermark unattainable for years.

Just like the oil giants, they appear to be hapless victims, floating on the currents of world events rather than guiding them. It is once more preferable not to overreact with the heavy-handedness that is so typical to Washington.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm.