Douglas A. McIntyre at 24/7 Wall St. is a little cynical that the government is up to the task of turning the economy around:

“After the GDP numbers were released, the Fed put out the minutes of its two-day Federal Open Market Committee. At the core of the statement was one of the greatest hedges in recent memory:

“the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”

It is the Fed’s way of saying, in terms that are hardly subtle, that if its programs to improve the credit markets, the Treasury’s plans to help banks and the auto companies, and the Administration’s budget and stimulus package works, then the American economy will walk away from the worst recession in memory. It is a preposterous statement which implies that, left alone, the financial health of the country would be in ruins. The sole salvation of the production, housing, and employment sectors of the United States rests in very few hands, all of them in Washington.

People who believed in the power of institutions like the Fed and Treasury will lose their faith and become embittered as time passes and the economy does not show signs of substantial improvement. That is a shame because it means that they will have needlessly turned their back on the concept that there is power in self-sufficiency.”

The real question is WHEN the economy turns around, will the government really have had anything to do with it?  Few argue that pure laissez faire should be followed. Even Nouriel Roubini argued that laissez faire was dead:

“To paraphrase Churchill, capitalist market economies open to trade and financial flows may be the worst economic regime–apart from the alternatives. However, while this crisis does not imply the end of market-economy capitalism, it has shown the failure of a particular model of capitalism. Namely, the laissez-faire, unregulated (or aggressively deregulated), Wild West model of free market capitalism with lack of prudential regulation, supervision of financial markets and proper provision of public goods by governments.”

However, Mr. McIntyre is arguing the idea that centralized planning embodied in the actions of the FED and Treasury without reference to free market principles AND the rule of law, is equally ineffective.  Roubini too, holds to this concept:

“But the design of the new system should be robust enough to counter three types of problems with rules. A tendency toward “regulatory arbitrage” should be kept in mind, as bankers can find creative ways to bypass rules faster than regulators can improve them. Then there is “jurisdictional arbitrage,” as financial activity may move to more lax jurisdictions. And, finally, “regulatory capture,” as regulators and supervisors are often captured–via revolving doors and other mechanisms–by the financial industry. So the new rules will have to be incentive-compatible, i.e., robust enough to overcome these regulatory failures.”

The regulatory capture risk is, with little doubt, not a risk- but a certainty, under the current management of the FED and Treasury.  Mr. Geithner is a prime example.  Can we actually think of giving credit for the recovery, when it comes, to such ineptitude?