In the 26 months since the stock market bottomed in March of 2009, stocks have risen 80%+ as the economy regained its footing after the 2008 financial crisis and ensuing market crash.

As impressively, the market has made such tremendous gains with only one significant correction, which ironically began almost a year to the day before the one in which we now find ourselves. Now, with the markets tumbling, many are unsure of why or how far they will fall.

To be blunt, the basic problem with the markets at present is that since the bottom investors haven’t been adequately compensated for the risks they’re taking in the markets. Sure stocks prices have risen, but that buying has been in anticipation of growth in revenue being passed onto shareholders. After all, when investors buy stocks what they’re really paying for is a share of dividends to be paid in the future (plus the break-up value of the company).

Unfortunately, since the bottom of the 2008 crash interest income paid to Americans has made almost no recovery (thanks to the Fed’s policy of maintaining low interest rates for “an extended period of time”). Dividend income, meanwhile, has ticked up just slightly and is still nowhere near pre-crash highs, and Personal Income Receipts on Assets has completely failed to keep pace.

The problem, upon further contemplation of these issues, is that they can all be traced back to the federal government’s actions.

Between numerous bailouts, bankruptcy restructurings that have taken ownership stake from investors and handed it off to unions, and other dealings, the Obama Administration has repeatedly acted out against America’s investing class in favor of “the masses.”

At the same time, the policies of Obama’s White House and Bernanke’s Federal Reserve have promoted the idea of cheap money. With capital so cheap for corporations because of government intervention (i.e.: Quantitative Easing, QE2, etc), investors are receiving less compensation for their risk in the form of transmitted earnings.

The question is: Why is the Obama Administration so focused on bolstering the balance sheets of blue collar workers, who have no capital at risk, at the EXPENSE of America’s investing class, whose financing is the true driving force behind production in this country.

Once we’ve identified the problem, it’s of utmost importance that we define a solution. The Obama Administration could, independently or through Federal Reserve mandates, take a number of steps that would quickly correct this problem of investor-compensation AND kick the economy into high gear.

First and foremost: raise interest rates. This should actually accomplish multiple ends. Rates don’t have to be hiked astronomically, but the days of cheap money need to stop. And since the yields of an untold number of securities are based on the Fed discount rate, investors will begin receiving greater interest and dividend income from their portfolio.

As significantly, raising interest rates will also give corporations an impetus to borrow. For the past several years companies have been able to hold off on borrowing for expansion projects because they always knew money would be as cheap tomorrow as it is today. Once they begin to realize that borrowing is going to get more expensive, they’ll pull the trigger on some of their projects – which should also get people back to work, coincidently.

Secondly, the Fed needs to stop paying interest on excess reserves banks keep on deposit in the Federal Reserve System. The way things are currently, banks can borrow from the Fed, redeposit excess reserves, and actually MAKE MONEY on the spread between their borrowing cost and the interest being paid to them. Let’s cut that out, and instead start charging a HOLDING FEE on excess reserves. That should do two things: get the banks to stop borrowing more than they need from the Fed, and start finding borrowers for the funds they do have.

The point to take away here is that there are several things the government could do to get the economy – and by extension the financial markets – back on track. However, in order to do so they need to abandon their long-standing bias against the investor class and start letting investors bolster the economy, rather than allowing their Robin Hood mentality to drag it down.