With the government's attack on Goldman Sachs, the stock market dropped 137 points last Friday. Now the markets are jittery about exactly what is happening, and why. The market hates uncertainty.

It seems clear the Obama Administration timed its attack on Goldman Sachs for political purposes: To generate momentum for their financial reform package. And today there is more news about other potential criminal probes:

A newspaper is reporting that federal authorities are picking up the pace in a criminal investigation of former mortgage giant Countrywide Financial Corp. and its role in the meltdown in 2007 and 2008 of the U.S. housing and finance industries.

Goldman Sachs... Countrywide... what other financial sector companies may be targeted? That's the question the market will be asking.

And many will be asking "Why? And what does it mean?" In a supposedly post-crisis environment where these companies are trying to recover, and the government is expending trillions of dollars to help them do so, what exactly is the goal in attacking them just when they are apparently getting back on their feet?

The market's reaction on Friday (the largest single-day loss in months) demonstrates what happens when the government attacks the financial sector. And attacking the financial sector doesn't just hurt the financial sector, it hurts the entire economy. If the financial sector is suffering from uncertainty, it will be even less likely to lend money than it already is. This will make it harder for individuals to get loans for homes (further hurting the housing market), it will make it harder for companies to get loans to expand (further hurting the employment market), and all of this will lead to less growth.

So why would the government be attacking the financial sector?

Perhaps this is exactly what I wrote about 10 months ago:

When the stock market goes down, investors often cash out of many of their stocks and invest their money in U.S. bonds... The stock market lost value but the U.S. government was flooded with so many offers to borrow money that they essentially didn't even have to pay interest...

In other words, if the stock market gets so scary (like the last few months of 2008) that people look for a safer place to put their money, all the sudden money may come streaming out of the stock market and get invested in U.S. bonds. Since there are trillions of dollars invested in stocks there's certainly plenty of money parked there that could be used to finance the deficit spending.

As I wrote last year, if the stock market goes down it generally becomes easier for the U.S. Government to borrow money, and that money can be borrowed at a lower interest rate. A government that is engaged in massive deficit spending actually benefits from a declining stock market because more money becomes available for it to borrow from the private sector.

In the face of a dwindling amount of money available in the world for the U.S. to borrow, and given increasing upward pressure on interest rates, a drop in the stock market would be "perfect" from the standpoint of the Administration:

1. There will be more money available for the government to borrow and spend.
   
2. The government can borrow the money at a lower interest rate.
   
3. This will relieve upward pressure on other interest rates, such as mortgage rates.

The question for the last year has been whether the Administration would really nuke the stock market in order to milk it of its liquidity. The timing of the Administration's attack on Goldman Sachs seems to make it clear that they're willing to risk the stock market for political motives (to get their financial reform package passed).

But I would submit that the attack is possibly just as likely about finding money for the government to borrow. If we're willing to consider the possibility that the government would attack Goldman Sachs for political reasons to further their financial reform package, we have to consider the possibility they'd do so in order to find sufficient money to borrow. A failure to pass the financial reform package would pale in comparison to the significance of a failed U.S. bond auction. And with U.S. Treasury Secretary Geithner repeatedly traveling to Asia to sell others on the idea of buying more U.S. debt, it's clear the administration realizes we're in trouble.

We'll have to wait and see whether this will be an ongoing attack on the financial sector or if it was just a single strike against a single company. But, already, it would appear that the effects are in line with what I express above:

Treasury prices posted small gains on Monday, pushing yields down, amid rising concerns about Greece's ability to fund itself and whether fraud allegations against Goldman Sachs may spread to other firms, extending a rally Friday as investors sought the relative safety of U.S. debt.

The government's attack on Goldman Sachs has immediately led to lower interest rates and more individuals loaning more money to the Federal Government.

The stock market has had a very good run for the last 13 months. I don't think it's a coincidence that this has been 13 months in which the Obama Administration has pretty much ignored the economy--it's been focused on health care reform. Now the Administration is apparently turning its sights on the financial industry and, given what it did to the health care industry, I think the financial sector is going to be justifiably worried.

If there are more attacks on the financial sector, I'd expect to see the stock market start a correction that many analysts think we're overdue for anyway. And that correction will lead to more money being available for the government to borrow, and it will push interest rates down.

If this is the plan, it's a risky one for the Democrats. They probably don't want to go into the mid-terms with a declining stock market.

But perhaps they've reached the conclusion that a declining stock market is preferable to having a big government that can't engage in big government spending because it can't borrow enough money.