We are beset by economic and financial problems of a magnitude not seen since the 1930s. Yes, these problems require government intervention now just to maintain the integrity of the system, but at what cost? And where were the regulators, or even regulations, before the problems became so evident? How much government intervention is too much? How can one preserve a capitalist system when government is threatening to become the biggest single beneficial owner within that capitalist system? The Shadow has a few thoughts.

First, the government was probably on the right track when it first set out to create TARP to buy some of the toxic assets owned by our major financial institutions. This action was not intended to “bail-out” these institutions, but rather to protect the system. But somehow the original idea to remove “toxic assets” from the books of the troubled banks and brokers has transcended itself into a major governmental ownership program of those institutions.

The administration of the program has resulted in an abomination with little accountability, and certainly not enough structure. For so many of the companies receiving TARP funds to be either unwilling or unable to provide information about where the federal money went is absolutely ridiculous. Further, the government’s supposed insistence that some institutions take the funds even when not wanted has diminished the credibility of the program even more.

Some action has been necessary in order to settle the markets and to keep them and trade working, but the thought processes employed have resulted in knee jerk and inefficient use of government funds thus far. The AIG situation is a prime example of good intent gone wild, with almost no one understanding where the billions went (until a partial explanation this week with the release of their payee list), and probably little idea of how much more may be needed.

The real issue facing the markets and the regulators now is simply one of confidence. Markets don’t stop functioning for any period of time just due to some participants’ losses. The kind of devastation that we have seen in the last six months has snowballed due to the loss of confidence in business and government leaders alike. What we need now is stabilizing action meant to restore people’s willingness to engage in both economic activity and investment activity without feeling that the “insiders” are being bailed out. The furor over the AIG retention bonuses paid is not an illogical rant, but rather is indicative of the fear that many non-market people have that the game is rigged.

So what does all of this mean to the hedge fund world? Obviously, accountability and transparency must increase. Pressure on fees will continue as we deal with the reality that there are far fewer geniuses running our money than we thought. Government regulation will be more part of our daily life. Yes, too much government or too little government can lead to a bad investing environment, and we currently are struggling to find the right balance.

But risk must not be allowed to be thought of as a dirty word. We must remember that risk taking is needed to produce returns. It just has to be managed to an acceptable level. It is the life-blood of the hedge fund space and is what we thrive on. It’s time we get back to proving that very tenet.

The views expressed in this column do not necessarily reflect the views of Channel Capital Group. Inc.