Thursday, March 20, 2008

Tooth Fairy Runs Amok at Bear Stearns

Congress is moving to look into the Bear Stearns take over. It makes sense; Bernanke is spending money like a Congressman. Last week he "loaned" 30 billion dollars to J P Morgan who in turn loaned it to Bear Stearns a non bank. This saved Bear from bankruptcy. J P Morgan then bought Bear for zero dollars (Of course they will pay for Bear Stearns' N Y office building, which some value at a higher price than $2 per share). This deal seems to have a peculiar smell to it!

To top that off, J P Morgan (a good pirate name) gets reimbursed for any loses incurred taking over Bear Stearns. If I understand this right, the Fed is guaranteeing funds of a non bank. This all transpired over a two day weekend. A 30 billion dollar deal went through with the snap of some fingers, no investigation, no nothing (so they claim).

Probably a lot of employees at Bear Stearns think that maybe bankruptcy would be the way to go. Spread the pain around a little. There is more than enough for everyone.

Wall Street thinks that Bernanke has saved the day, the DJIA is back to normal. Ask one question, who in their right mind would loan 30 billion on worthless assets to a non bank, just to keep the status quo? This defies comprehension! The only way to describe it is "Tooth Fairy Economics and/or March Madness." If regular every day bankers think this stuff is pure crap, why argue?

We have gone from "lender of last resort," to “the last 'non compos mentis' lender.” If this deal is allowed to stand, it implies the possibility of a Federal Reserve bailout of Fannie Mae without Congressional approval.

Is Bernanke really loaning Fed funds? If a bank defaults on paying back these Fed loans, guess who gets the collateral? Transfer of ownership is a sale. At that point it is is no longer a loan; you bought it sucker! Bernanke has overstepped his mandate. Congress spends our tax dollars not the Federal Reserve.

This mess is a little like using battery acid to remove a coffee stain on a white shirt. It kind of works, but it doesn't solve the problem. It only makes it worse.


moneythoughts said...


I disagree. You're too dramatic. Bernanke made a good move in my opinion. He didn't create the situation that he finds the capital markets in. It is a heart lung transplant, but I think it was a necessary step.

I was just checking out people interested in economics and came across your blog.

I write and paint. Take a look at my blog, you might find it of interest.


Jim in San Marcos said...

Hi Fred

What Bernanke did was stop 6 other non banks from imploding. They now have more time to die. The smart money has time to clear out. He has only postponed the inevitable

The S&L bailout of the 1990's was only 120 billion. One transaction of 30 billion today is way beyond all credibility.

The real discussion is whether the Fed should interfere in the market place. I feel as do others, that it shouldn't. Let the market collapse and reform anew.

I skimmed your blog and we think along the same lines. I do however think that there is no linking between the Federal Reserve and the Treasury. Treasury auctions set rates, and in a panic people will accept the current rate. Remember there is no max amount of investment so it is all Federally insured. This is where the rich seek harbor in stormy times.

The Fed funds rate should be higher than the T-bill rate to stop any carry trades.

The real question, does the interest rate take into consideration the current inflation rate of 10%. Probably not.

Here is a link to Freds web page

Thank you for your comments


I think the big picture is, we're hoping everyone else keeps believing, so we can get ourselves out in time. And I think the big boys are thinking the same way.