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Bear Stearns and the NY Fed |
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Friday, 14 March 2008 |
Another day, another major bank bites the dust.
Rumors had been flying around for a few days, hinting Bear Stearns
might be facing liquidity problems. Typical denials were initially
issued by the CEOs and PR specialists, but this morning the bottom fell
out.
The official story from the execs at Bear Stearns is that their
liquidity problem occurred literally "overnight" in a 24 hour period.
They must have been hanging pretty close to the edge before that.
Of course, here's the real story: JP Morgan and the NY Fed promising to come to the rescue. What's at stake? $266 billion in assets and $229 billion in debts. The winner: Morgan and the Fed. Cheap assets available for bidding with government money to leverage the transaction. The fed increases its own influence and prestige.
The risk of course, is that Bear Stearns' assets are currently invested and leveraged in other financial institution's assets - if these assets are liquidated in a market that doesn't want to pay much for financial instruments, all of the invested institutions will start to lose value and more companies will be forced to sell off - a cycle that hasn't been seen in America for almost 80 years.
Who loses? Other financial institutions. The American people. In the last few weeks, bailouts have been proposed and put into motion each on the scale of hundreds of billions of dollars. The rate of Fed intervention over the last month has been approaching the rate of our total GDP. That's the scope of the risk apparently. Everything.
Simply put, this can not continue without collapsing the entire U.S. economy.
Early indicators are suggesting double-digit inflation while the labor market stagnates and declines, by any "technical" definition we've entered one of the darkest periods of American economy - not this decade or generation - ever. CPI, unemployment rate - throw these indicators out the window because they are reliant on what the government defines.
In the meantime, certain banks and the federal reserve are able to buy up assets at distressed prices using public money, or more accurately, private capital leveraged by public risk. The major beneficiary is the acquiring banks, JP Morgan, the Fed, as they are able to use their unlimited money supply to buy out competition at heavy discounts. Explain to me, how is this supposed to fix the economy, exactly? Is the Fed hiring?
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Last Updated ( Friday, 14 March 2008 )
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