NEW YORK (TheStreet) -- Slower economic growth, prolonged unemployment and lower investment returns may be the "new normal" -- as Pimco's Bill Gross and Mohamed El-Erian said -- the government's deeper involvement in the private sector is the "new abnormal."Just look at the dominant market drivers for the rest of this year - mid-term elections, further quantitative easing, the tax cut debate and forthcoming financial services and health-care reform regulations, just to name a few. The government's activist role has almost made earnings season a secondary event. When the Troubled Asset Relief Program, or TARP, was set up two years ago this week, my Treasury colleagues and I labored day and night for weeks to invest taxpayer money directly into a broad portfolio of financial institutions -- an unprecedented, controversial and seemingly paradoxical move given that the terms "free market" and "American democracy" are often uttered in the same breath. I viewed our task as an unfortunate, but necessary, measure to stabilize the financial system and, in turn, the broader economy. However, I took solace in the expectation that the government's intervention into the markets would be limited in objective to arresting the recession from spiraling into a depression. Yet, two years later, the public sector's intrusion into the private sector is spreading rather than receding, creating greater uncertainty and angst among investors. The housing bubble and subsequent financial crisis alone are not the cause for the federal government's encroachment into the free-market system. Progressive ideology has for years envisioned government playing a bigger oversight role. And incidents like the BP ( BP) oil spill and this summer's "flash crash" on Wall Street have further eroded the public's faith in the integrity of the private sector. Nevertheless, regardless of one's perspective of the causes -- or even the appropriateness, for that matter -- of the government's greater shadow over the private marketplace, one thing is crystal clear: This is not merely a populist fad, but an evolving trend. With an estimated $900 billion output gap, sub-par growth and protracted unemployment are here to stay. As a result, the government will seek to spur economic activity while simultaneously weaving a broader regulatory framework in an attempt to root out the next crisis or bubble looming ahead. In the past, there was a class of investors who chose to eschew investing in those few sectors that were deemed "heavily regulated." However, this is a luxury no longer available. Government now touches in one form or fashion every corner of industry.
Despite misguided predictions of coming gridlock, the pendulum will continue to swing toward greater government involvement in the marketplace for the foreseeable future. Even if the November elections produce a wave that the Republicans ride to a majority in Congress and an influx of Tea Party standard-bearers who favor small government and less taxes, we are coming off two years of the most robust legislative cycle in modern history. The Obama administration will remain in charge of the executive branch, so expect a new phase of sweeping regulatory and enforcement activity that could hurt business models dramatically across several industries. Some investors are hopeful that once the midterm elections come and go, we can put this latest silly season in Washington in our rear-view mirror and move on. But Nov. 3 is not just the day after the mid-term elections, it's the first day of the 2012 presidential campaign. Despite what we learned in fifth grade civics class, policy decisions are never immune from political interests, particularly during a presidential campaign season. Washington's debates, let alone actions, are exacerbating volatility and making it nearly impossible at times to adhere to traditional investing based on bottom-up fundamentals. Many investors remain wistful for the past, but they would be wise, for better or worse, to accept - and, indeed, embrace -- the new abnormal. Investors need to analyze anticipated actions out of Washington just as they estimate future earnings streams. Unfortunately, policy outcomes are not as easy to plug into a model as traditional quantitative data. But to ignore the demand for such qualitative analysis would be imprudent, and potentially perilous, in this brave new world. Welcome to the new abnormal.