Kass: Under-Regulated, Overcompensated

Stated simply, allowing investment banks to be levered over 30-1, private equity deals to be levered at 20-1 and hedge funds to be levered over 5-1 is, as a friend mentioned to me over the weekend, "the financial equivalent of playing Russian roulette with five of the six chambers of a loaded gun."

Laissez faire policy has failed. And since the markets have grossly failed to impose the type of discipline that was necessary to protect the system from the accumulated buildup in credit (and the current contraction), regulators will now step in. Unfortunately, it is now too late as once again the regulators will prove to be reactive, not proactive.

For now, the rescue packages will dominate the day.

But for tomorrow, the effect of a credit market running amok will be felt hard by the real economy.

I have long written that the impact of deleveraging was the equivalent of a broad monetary tightening, and with the Lehman Brothers (LEH)/American International Group (AIG) news over the weekend, the extent of the economic damage to the real economy, though still unknown, will be widely felt.

Memo to investment strategists/economists and their economic and corporate profit forecasts: Get real.

Memo to investors/traders: Continue to err on the side of conservatism.

Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass' daily trading diary, please click here.

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