Editor's Note: This interview was recorded the week of October 10th.

Mike Norman, HardAssetsInvestor.com (Norman): As financial markets collapse, governments around the world step in to try to stem the panic. My guest today says that's going to be the wrong move.

Hello everybody, this is Mike Norman. I'm your host here at HardAssetsInvestor.com. Well, my guest today says that an unwarranted intrusion is only going to make things worse. Here to talk about it is Martin Fridson. He is the CEO of Fridson Investment Advisors and also the author of the book "Unwarranted Intrusions"; very apropos the title now.

You say now the actions … and let's face it … what we're seeing now is really unprecedented, the scale of it. It is global – we're about to finish the worst week in history for the stock market here in the United States. Governments around the world are now stepping in to try to come up with policies to stem this collapse. You're saying it's only to make things worse. Why?

Martin Fridson, CEO, Fridson Investment Advisors (Fridson): Well, I think that we've got ourselves into a mess; no one can dispute that. I think that historically there has been some notion – even if you're not in favor of government intervention in ordinary commercial activities – that depository institutions represent something of a special case. If there's a contraction of credit as a result of a run on the bank, then you have an impact on the economy as a whole.

So there's always been some notion that you might treat those a little differently. They're certainly taking that very far at this point to look at nondepository institutions, activities such as buying troubled assets, really going far beyond anything that's been proposed in the past.

Norman: Let's talk about that for a second, because obviously commercial banks do have this protection via the Fed; that's been expanded now. But people would say … some would argue, look, commercial banks account for maybe 20, 25% of all credit in the economy.

The rest comes through the so-called shadow banking system, this unregulated vast universe of intermediaries, finance companies, hedge funds. And sure, we could protect the banks through the Fed, but if you let that 80% universe go down, it takes us all down with it.

Fridson: Well, there's no question that the commercial banking system as traditionally viewed has become a smaller part; credit is provided by other means. When you start looking into some of the problems that have arisen at other institutions, you often find at the root of it interventions that have given rise to the problems. I think most particularly, in recent years, the insistence on raising the home ownership rate to a level anything short of 100% in the minds of politicians is suboptimal, and we clearly have seen the adverse consequences of that sort of policy.

Norman: Well, yeah, but some would say we have a very high home ownership rate relative to other countries in the world, so from that perspective I guess it was a success. That was a public policy decision - not so much a financial decision – and we stood behind it, I guess, in the backstopping of Fannie Mae and Freddy Mac, which continued to make loans - really the only entities now injecting the mortgage liquidity into the market.

Let's step back and look really at the big picture here. The model … the model of this so-called, this system of intermediaries, the shadow banking system … has it just totally failed and are we witnessing - it's almost like a cosmic event - the annihilation of this?

I mean look, we had Bear Stearns fail, we had Lehman Brothers fail, Morgan Stanley now teetering, maybe even the vaunted Goldman Sachs. Are we witnessing like the annihilation of this system? It just had too much risk inherent in it, and going back to the old model of the commercial banking system?

Fridson: Well, I think that we have had the stand-alone investment bank already disappear in a fairly short period of time. The idea set in and it was almost a self-fulfilling prophecy really. There isn't the confidence - that's the real problem right now - just a lack of confidence in financial institutions. Are you willing to be a counterparty to another institution?

And the conclusion was that without the strength of the deposit base, institutions could not any longer engage in the very large-scale transactions that they've been trying to up until now.

Norman: And even with the insured deposits and FDIC backing, we still see a lot of reluctance on the part of banks to lend to each other - and this is at the root of the credit crunch - and the problem that governments and central banks are trying to address right now.

We're going to take a break. When we come back, we're going to talk some more about some investment opportunities, potentially in high-yield bonds; that's where your specialty is. So don't go away; stay tuned for the second part of my interview with Martin Fridson. This is Mike Norman, be right back.