March 17, 2008
U.S. NEWS: I am so proud of all of you for bailing out the investment bank Bear Stearns. Did I hear someone say, “That’s news to us.” Surely Bronco Ben Bernanke contacted you prior to pledging federal funds to bail out Bear?
This is the same Bear Stearns whose CEO received $14.7 million in 2006…as a bonus!
The reasoning given for the FED and rival bank J.P. Morgan Chase bailing out the troubled bank explained Richard Bove, an analyst at Punk, Ziegel & Co, was that left unattended, “it has the potential of bringing down the whole market.”
What happened to Bear Stearns? In a nut shell, there was an old fashioned run on the bank. The natives got a little restless. Being an investment, rather than a commercial bank, there are no government guarantee’s (FDIC) to protect the investors.
So then are there other banks in the same boat? Apparently not Goldman Sachs, whose CEO, Lloyd Blankfein received a bonus in 2007 worth $68 million. The employee’s didn’t fare too badly either, with an average bonus reported as $661,490.
Is Goldman then immune from all the banking problems? I don’t think so; their turn just hasn’t come up. But, as we see massive commercial loan failures; it will. Goldman made a lot of their money funding heavily leveraged mega buyouts.
But not to worry, this is America. Bring us your poor, your tired, and your bad loans and we’ll force the Middle Class to bail your sorry butts out. If Bear Stearns is bailed out, why not Goldman Sachs should their fortunes turn?
The FED went into emergency session over the weekend and lowered the Fed funds rate by ¼ percent. Tomorrow, just two days later and at their regular meeting, Bronco Ben and the “Inflation Five” will vote to lower the rate by another ¾ percent.
At the same time, more than $200 billion dollars are being pumped into the system by allowing the banks to put up their bad real estate loans as collateral.
This move is intended to render any savings worthless as real inflation rages above 7% and interest bearing paper drops to near zero. The underlying intention is two fold; one is to drive money out of savings and back into the more risky stock and real estate markets, and two, is to make money so cheap that a new round of borrowing begins before the election. And, lucky you can use your tax rebate for a down payment. Funny how this all came together huh? Must be a coincidence.
The real dastardly ingredient is inflation, which will artificially drive up real estate and other values in order to create the false impression of equity with which to position the new loans against. This move will also drive up tax collection.
This is a dangerous game that the Fed is playing. An inflation based recovery is bad business all the way around and a last ditch effort.
The deadly brew of inflation is being cooked to perfection. The dollar will continue to shrink, prices will continue to climb, and those on fixed incomes will suffer the worst of it.
America’s economic pyramid scheme has reached the point that acting in the best interest of the masses is no longer possible. Middle America and the cat’s on Wall, can’t both be fat.
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Hey Mike, Right now I am contemplating how much gold I can find in my backyard. Maybe I need to move to Colorado and buy an old mine. At least I would be giving myself the shaft instead of the government. I have only 2 gold fillings left in my teeth and I am thinking I might want to hang on to those.
It seems somewhat humorous seeing a sinking government trying to bailout a sunken investment firm until you remember that we are the bucket. I’ll bet all of those pan-it-yourself gold sites along all those streams in Colorado will be doing better business this summer. I’ll bet bank robberies will go down and jewelry stores heists will go up. I’ll bet that I better quit betting anymore.
It really makes you wonder if there are any sane economists out there anymore. Probably the only ones left are the ones the government and financial companies are not listening to. What is it going to take to get these institutions to listen to the voice of reason before it goes hoarse from yelling at them? Have a good one Mike and take care of your throat!
Michael,
Getting the gold mine shaft these days could be a positive event.
And, I suspect you are correct about the pan-your-own places. Reckon the price will go up for panning?
I do some panning and will do a whole lot more this year.
The problem that I see with gold is that the average person can’t just sit on it, even if they could afford to purchase the darn stuff at todays price.
I better go round up my pan and rest my voice for the coming events.
Hi Mike,
As you know, I’m no expert in economics (and in your book, that’s a good thing!) but I’m reading everything I can get my hands on. One thing I’ve learned is that Bear Stears is not even a bank (a guy named Nouriel Roubini at http://www.rgemonitor.com is worth a good read). So the fed’s bailout is plowing new ground as far as screwing the taxpayer is concerned.
All I can find in my backyard is sand, with maybe a bit of “fools gold” mixed in. Lord knows there’s enough of that around.
I notice you don’t need to open with “Wake up, Middle America!” anymore. I don’t think any more wake up calls are needed.
Kathy,
The Fed had to go back to 1932 to pull this one out. An old law allowing the Fed to lend to other than member banks was enacted during the depression years to bail out institutions that posed great harm should they fail.
And, since portions of the U.S. are in depression, the old law fits in nicely.
Shares of Bear Stearns fell to $2.00 and less than a year ago traded for $159.00. The stock holders aren’t happy campers.
This should scare everyone to death and question what ANY stock is worth. Enron comes to mind.
Bear was leverage 30 to 1 (assets to loans). Good work if you can get it.
Hey Mike, That is a good one. A Republican government using a Democrats law to bailout a failing investment firm. I presume our government(meaning us) does not get any shares in “Beer Stearns”. That would be too much to expect I suppose. And Bush/government still calls itself conservative! What a hoot! I hope Bush does not outlaw humor otherwise we will truly have nothing to Fall back on. Take it easy Mike!