Fed bails out Bear Stearns

From Bloomberg:-

Bernanke and the four Fed governors voted yesterday to become creditors to Bear Stearns Cos., a securities firm that isn’t a bank, by invoking a law that hasn’t been used since the 1960s. Three days earlier, the Fed said it would swap Treasury notes on its balance sheet for privately issued mortgage-backed securities held by Wall Street firms.

“It’s a re-drawing of the relationship of the Federal Reserve with the rest of the financial system,” said Vincent Reinhart, former director of the Division of Monetary Affairs at the Board. Risks of so-called moral hazard, where firms will now come to count on bailouts by a federal agency, “are considerable,” he said.

I don’t think taxpayers should bailout failing businesses and I don’t make an exception for banks. However if a central bank is going to offer finance to bail out a business such as this then I think they should do so only on the condition that they receive an equity stake (which they should offload on the market at some later point) and that the board sack the CEO. This would at least mitigate some of the moral hazard.

82 thoughts on “Fed bails out Bear Stearns

  1. I’m in two minds about this issue. On the one hand the Fed wants to prevent the obvious problems associated with contagion.

    On the other hand the Fed is preventing the ultimate plunge that would have finally cleaned up this mess in the credit markets.

    The fed doesn’t need an equity stake because their objective is not to save Bear Stearns. The Fed has basically told them that they have 28 days to sell themselves or clean up their books as their done. Bear Stearns will not exist any longer and the shareholders will have done nearly all their money.

  2. Terje – banks are an exception, i’m afraid, because the entire banking system is built around confidence. much as it pains me to say it, but the systemic risk of a counter-party the size of Bear going under is truly frightening. however, i agree with you that the existing management should be forced to resign and those lending emergency funds should take an equity stake.

    Britain has already experienced a bank failure (Northern Rock) and how not to manage it by the govt.

  3. Every business is built around confidence. The history of banking prior to central banking does not suggest that government intervention is overly necessary. Although with central banks being a modern sourse of instability themselves they somewhat justify their own existance.

  4. no – an entire food company is built around confidence. if consumers suspect that Woolworths has been buying dodgy out-of-date food on the cheap, it doesn’t stop shopping at Coles. The difference with banking is a failure at one bank triggers panic in the entire system.

    anyway, i hear that Bear has been pretty much told to hammer out a deal to sell itself to JPMorgan before the markets open Monday morning (about another 16 hours). at least it’s the end of the road for the managers who got Bear into this mess. JPM are unlikely to retain anything except the Prime Brokerage business.

  5. if consumers suspect that Woolworths has been buying dodgy out-of-date food on the cheap, it doesn’t stop shopping at Coles.

    Correct. However if there was an outbreak of mad cow disease on a single farm in Victoria the entire Australian beef industry would suffer.

  6. This idea of exceptionalism was used by the car industry also when we first began dismantling car tariffs. There was this argument that we need the manufacturing base in case there was ever another major war. The French use exceptionlist arguments to protect their farmers. The my industry is exceptional argument seems to be a pretty routine phenomena. We see it in health care also. The argument is that health is an essential services so it must be socialised.

    Banking is an important industry. However it should not be sheltered from the market.

  7. Its just a SPECIFIC printing-press bailout as opposed to a GENERAL printing-press bailout.

    The General printing-press-bailout has been going since about August.

    “I don’t think taxpayers should bailout failing businesses and I don’t make an exception for banks.”

    Well what do you mean by this Terje? Do you not realise that the entire American economy would have been totally destroyed without this general printing press bailout?

    Your lack of understanding here is because you will not learn what the money supply is all about. The monetary system was rigged up so that if the printing press was ever turned off the whole financial system would collapse.

    Every time I talk to you about monetary matters we get this belligerent refusal on your part to understand what money is and how the current system works. They have a massive amount of money pyramided on a tiny bit of cash. The failure to extend an implicit bailout on this ridiculous system means more or less instant collapse.

  8. Terje – imagine the situation. It is 2020 and you are Treasury Secretary in a Coalition government where the now ten-year old Libertarian Party holds the balance of power together with the Australians First party. A trader at the NAB (named only as ‘JC’ in the media) has left the bank in acute trouble. There is a run on the NAB. Depositors camp outside all the major banks all weekend to be the first to get their savings out when the banks open at 9am on Monday morning. Do you

    a) do nothing
    b) step into guarantee the depositors of the NAB
    c) guarantee the NAB depositors and take a 51% equity stake in the bank.

  9. Bailouts are absolutely fundamental to the fiat-fractional reserve system. Particularly if there is no reserve asset ratio. Since we got rid of our reserve asset ratio and even before that we have implicitly been in a situation where the central bank will bail out any of the banks.

    It cannot be otherwise since the banks only retain maybe $2-$5 for every $100 that they owe on-call. So the whole system is set up for the trucks to come from the mint full of cash at a moments notice.

    The only way you could make the banking system competitive and like a normal industry is to phase-out fractional reserve over a few years.

    We have had several threads of doom covering these matters but this whole subject appears to take on a religious aspect to some people. For this reason few people have learned anything from the threads of doom since all these goons come in and wreck the thread. The last example was the Reynolds filibuster where he went from October to March spamming me but without any valid argument whatsoever.

    But every thread of doom is like this. And its basically about people not wishing to give up their inflationist religion.

  10. Role play. How fun.

    Mostly (a). Although political reality would require a lot of very concerned rhetoric and the opposition leader (Bob Brown) would need to be characterised as being naive and as pandering to the banks. I’d use the crisis to announce the final stage of abolition to the Income Tax and explain that in difficult time such as these we should be taking even less from peoples personal income. Certainly I’d be talking to the Attorney General to ensure that he/she was on the case regarding possible criminal proceedings. He/she should be making it clear that we would hunt the culprits to the end of the earth (aka Skase). Of course the RBA was carved up and privatised during our second term in 2015 so I won’t need to tell them to stay out of it.

    Option (c) does not require the government to finance the bailout. Several international banks would be big enough to pick up on the opportunity. I’d be talking to them to make sure no red tape sat in the way. I’d be talking to the ACCC (assuming we hadn’t already axed them) about the need to stand aside and allow any buyout.

    Of course my PM might have other ideas. Perhaps you could direct any further questions to his office.

  11. This is an idiotic contribution form Alan Jones. Keeping inflation expectations down are a Central Bank’s primary goal. This is populist rubbish.

    I’ve just heard that JPM have bought Bear for $2 ($270mm) a share vs a share price of $65 on Thursday. Nice trade!

    Apparently Bear’s headquarters in NY are valued at over $1bn.

  12. They don’t keep inflationary expectations down pommy. They CREATE INFLATION. They debase the currency. This is what they do. They are counterfeiters. Counterfeiting is not keeping inflationary expectations down. Creating inflation is no way to reduce inflationary expectations.

    Alan only seems to have called for a replacement of the team. I say the bank ought to be scrapped. But we’d have to phase out fractional reserve and deregulate banking first.

    Yeah they should all be sacked and others replace them. Preferably non-bankers. They have no idea what they are doing. They’ve kept us out of recession for many years its true. But they’ve only been able to do this with rampant inflationary policies that distort gross investment.

  13. My understanding of the specifics relating to Bear Sterns is still evolving. However at present it appears that the FED will take on over $30 billion of questionable financial assetts (ie debts owed to Bear Sterns) and presumable takes with that a lot the liabilities (ie debts owed by Bear Stern to other banks) and JPM buys what is left. As such the fed is doing a favour not for Bear Stern nor for JPM but for the banks that Bear Stern owes money to. If anybody is in a position to understand the risk of dealing with a particular bank then surely it is other banks. Risk management is after all their claimed area of expertise. If in my business I deal with some dodgy customer and at the end of the day they don’t pay (or can’t pay) then it comes off the bottom line. The cost doesn’t get socialised.

  14. Terje, I’d hug you if I knew where you were. You make the most excellent point about bailouts.

    John

  15. i think JPM have separated $30bn of illiquid assets for which they have refused to take onto their balance sheet. the Fed is on the hook for these assets.

    the more i have read about this bailout, the more i am convinced that it was the right thing to do by the Fed. Bear had over $300bn of assets on its balance sheet on thursday supported by just $13bn of shareholders funds.

    letting it go would have wreaked havoc in the markets, probably brought down hundreds of hedge funds who have pledged assets to Bear and brought the credit derivative market to a standstill.

    the knock on effects for the consumer, the family with a mortgage, the pensioner etc would be enormous.

  16. JPM don’t need the fed to cover for illiquid assets. It could value those assets at nil and bid accordingly. What it needs (or wants) the fed to assume is the Bear Stern liabilities. The fact that the fed gets some worthless assets along side the liabilities should hardly be news worthy. It is the act of assuming liabilities, not the act of assuming poor assets that the US taxpayer should be concerned about.

    If this was a company in any other industry the administors would go in, flog off the assets for the best price possible at market, tell the creditors to take a hair cut and leave the shareholders with nought. The fact that bankers, a profession which pays some extrodinarily genereous salaries and commissions, should be bailed out by the taxpayers is obscene. If the creditors can’t afford to take a hair cut they should dilute stock to pay their way out. If the government insists on bailing out such individuals it should insist on an equity stake (or at a minimum a very high rate of interest). Rewarding failure to manage risk, in an industry that is meant to specialise in risk, is unacceptable. These guys should feel the harsh pain of capitalism just like the average joe mechanic does when things go south. The world does not owe bankers a living. If they can’t do their jobs they should pack up and move on.

  17. The fact that bankers, a profession which pays some extrodinarily genereous salaries and commissions, should be bailed out by the taxpayers is obscene.

    Who is being bailed out? I have many friends at Bear. They are all now out of a job. They were also largely paid in unvested stock (at prices between $100 and $150 a share, versus the $2 bid from JPM. Shareholders have been totally wiped out and the senior managers are all going to be fired.

    Which bankers are being bailed out?

  18. Hey terje:

    Bankers and brokers at times earn a lot of money because what they do is difficult. How about I give you a phone a desk in a trading room and let see how well you do.

  19. Hey what happened to ‘the credit crunch being over’?

    Looks like we are headed for a massive depression after all, in spite of your ‘wisdom’.

    I love to say ‘I told you so’, so: I told you so.

    Idiots.

  20. pommygranate,

    I had a big argument with the idiot assigned to treasurer of the LDP. He and his buddies held that the credit crunch was over and things would get better. This was back in January.

    Turns out they were wrong, no big surprises there.

  21. Bob

    I remember now. The guy that managed to alienate nearly all ALS readers in just one thread. quite an achievement.

  22. So Bob, you are gullible enough to assign “sub prime mortgages’ to every single financial crisis for the next ten years? Bad management? Poor asset selection?

    Look, the cost of capital may have risen, but if you don’t do good asset selection, diversification, hedging, retain enoguh profits or do enough capital raising, it doesn’t matter what the cost of capital is, you’re stuffed.

    The US Fed funds rate went way, way down before they finally fell over. Why didn’t they borrow at approximately one third of the rate of global interest to refinance their loans directly from the US Fed and then do a credit risk swap?

    Since you’re the kind of guy who thinks we’re teetering on collapse, please tell us when it will happen so I can align my repayments exactly so I can live it up until armageddon with no come uppance.

    Come on Bob. Let’s have some explanations rather than shameless self promotion of your oracle-ness.

  23. pommygranate,

    I don’t mind alienating fake libertarians and idiots. Just wanted to point out that those who think they know most about the world usually know least.

  24. Mark Hill,

    To be frank, this (global) collapse is the immediate result of a correction in two markets. First, the credit market, and second, the asset market.

    Both markets have been unpinned from their fundamentals for arguably decades. Credit has been kept artificially cheap due to central banking, and asset prices have become hugely inflated due to the huge amount of cheap credit flying around the globe. (People, countries, and nations bidding up the price of assets based on how much they thought they could risk borrowing — usually in the hope they could sell the asset for considerably more and walk away with the margin.)

    Ultimately this may or may not be a correction in money itself. Fiat currencies mathematically must self destruct eventually. They have no objective value, only the value given to them by the combination of the threat of violence, theft, and quantity in circulation.

    I never told you that the credit crunch was subprime only. You asserted that (incorrectly) yourself. I, as I recall, explained to you that when the margin calls are made people will find that what they thought previously were good investments were actually crap, and that more than half the money invested in Australia was in-fact borrowed money, which will be returned by way of asset firesale.

    Get ready for the ride fellas, those of you smart enough to have no debt and big savings will be surprised at what you will be able to pick up for as little as 10k in a couple of years. I’m looking forward to getting a decent sized parcel of land, on which I intend to grow most of my own food.

    If you have debt then pay it off now. Because the collapse is likely to accelerate and keep accelerating. When the middle eastern states stop selling oil in USDs, and/or the Chinese stop buying US treasury bonds, it will go into extreme freefall. Hyperinflation is just over the horizon; It could break any day now.

  25. I’m not sure if this helps, but the following is a link to a recent conversation between the American economists Russell Roberts and Tyler Cowen discussing monetary policy. You can listen/download the mp3 (runs for 1hr) or read the transcript. There’s also a section for feedback.

    Its a wide-ranging discussion which includes: how monetary policy works, deflation v stable prices v inflation, recent history, influence of Milton Friedman, competing currencies, the NZ experience and the gold standard. Unfortunately, both economists are clearly not experts in this field and were floundering somewhat.

  26. This is disappointing, and I fully support Terje’s take on this issue.

    As libertarians, opposition should be made to all forms of welfare and the redistribution of wealth to special interest groups (whether it is for the poorer, or wealthier ends of the spectrum). A bailout is simply corporate welfare in action.

    A market, particularly under a fiat monetary system, requires corrections from malinvestment and excess credit. The Fed’s attempt to fix the situation through more credit, is only prolonging the sad state of affairs and deepening the recession headed their way.

    Capitalism and the free market works when lessons are learnt (sometimes the best way is the hard way). If we don’t, business will continue take high risks with little care for the consequences.

    This is an interesting discussion on CNBC with Jim Rogers (before the announcement regarding Bear Stearns).

    Jim Rogers is a man that definitely knows what he is talking about.

  27. Just wanted to point out that those who think they know most about the world usually know least.

    Guess you don’t know much about the sky Bob. You sure think you know a lot about it falling.

    You’re not already growing your own weed and magic mushrooms by any chance are you?

  28. australianliberty

    you’re quoting from the libertarian manual without thinking. yes, we all know that corporate welfare is corrosive in the long run. but think of now. a bank that survived the Great Depression has just disappeared without trace. its senior managers are gone, nearly all its employees will be fired and its stockholders will be left with nothing. and financial markets are still just about functioning.

    where’e the corporate welfare in this?

    the interview with Rogers is very good – he’s a smart guy.

  29. DavidLeyonhjelm,

    Humourous as always; I wonder who you’ll blame when your misunderstanding of reality gives rise to unexpected consequences? I don’t need to make you look foolish (although it is quite fun) because metaphysical justice will do that part for me. All I need to do is come back every couple of months and say “I told you so”.

    For your kids’ sake I hope you haven’t got your savings in the Australian stockmarket… that is if you have any savings.

  30. Propping up the market with cheap and artificially low credit is corporate welfare. Not having a central bank would resolve most of these issues, but that’s not going to happen.

    It just takes a couple of “lender of last resort” responses and the ignorant cosy up to the warm fuzzy feeling the fed gives. If there are enough ignorant people, then the problem rides itself out…however I believe there are many people who are growing aware of what is happening.

    “Yes, we all know that corporate welfare is corrosive in the long run.”

    Enough said.

    I do believe that we will eventually recover from this downturn. I feel that if we get the mess out of the way now, we can recover with a stronger position.

    And if we truly believe capitalism and free markets are as good as we think they are, they will rebound.

    Also, take a leaf from David’s book. A business going bust isn’t the end of the world – no matter how large, or how long they’ve been around for. We’ll all wake up tomorrow with the sky still there and people still producing and profiting.

  31. Pommy,

    In comment #35 you repeat the question asking where the fed is providing welfare. I answered this already at #21. Do you have a problem with the answer?

    The fact the fed is assuming somebody elses liabilities should make it plain that welfare is being given. If bank XYZ lends money to Fred and Jane for a house and Fred and Jane subsequently default on the loan then the bank needs to live with the consequences of that bad debt. It would be welfare to use printed money or taxpayers money to bail out bank XYZ just because Fred and Jane defaulted on their debt. Banks are meant to manage risk, thats their specialty. Likewise if bank XYZ lends to Bears Stern and Bears Stern defaults then bank XYZ needs to live with the consequences and take a hair cut. The money to pay for the failure of Bears Stern should come from the bottom line of those banks that lent to Bears Stern. It should not come from either the printing press or the taxpayer.

    In any case it would seem that the feds action has backfired to a significant extent. Rather than spread calm their actions have caused disquite.

    JC – Lots of people work hard. I never said banking was easy or that bankers don’t work hard. Do you get all sentimental when farmers do it tough and want a handout or when workers at a car manufacturing plant risk losing their jobs and ask for tariffs? Are you and pommy going to go all socialist on us when it’s your professional peers that are hurting?

  32. Bob – The treasurer of the LDP is one of the smarter people that I know. That does not mean he is never wrong, but he is certainly not an idiot. You should learn some better manners.

  33. I don’t get the point you’re trying to make, Terje. My comment was in response to you bringing up that bankers are high earners. So what? What has got to do with anything? Why bring it up if it has nothing to do with the price of bad apples.

  34. You mean this comment I presume:-

    The fact that bankers, a profession which pays some extrodinarily genereous salaries and commissions, should be bailed out by the taxpayers is obscene.

    The point was something of an aside, merely to point out that this was welfare for the rich. Perhaps it is not overly relevant but we all seem to have an extra dig at welfare when it is for the non-poor. I believe your following comment is in a similar vain.

    http://catallaxyfiles.com/?p=3037#comment-47252

  35. Terje

    If a car manufacturer runs into trouble, then there is no reason for the state to bail it out. if a farmer comes to the conclusion that his region’s dry climate is not suitable for growing wheat, then that farmer should sell up and move.

    but banks are different. because one bank going bust is not an isolated event. imagine the NAB announcing it was seeking an emergency loan from the RBA. people would q up all night to withdraw their money. then, they would take money out of all the smaller banks worrying that the same fate might befall them too. then you have a run on confidence. this leads to a serious recession and mass unemployment when it could have been nipped in the bud early.

    sometimes libertarian dogma must give way to real life pragmatism.

  36. I believe if we had followed libertarian dogma, this wouldn’t have happened, and banks would have learnt their lesson a long time ago.

  37. Pommy,

    I assume that you now accept that welfare has been given and that you are now arguing the case for such welfare rather than denying that welfare was given.

    If banks are so different then lets nationalise them. If banks are different then lets regulate them. If banks are different lets enforce reserve ratios or let GMB have his 100% backing regime for demand deposits. If banks are different lets re-regulate interest rates. If banks are different lets bring back capital controls. Surely free from libertarian dogma that is the pragmatic thing to do. If nationalising loses for the sake of the greater public good is acceptable then surely nationalising profits for the greater public good is fair enough as well. Why let dogma halt the latter?

    It is folly to prop up confidence in a system if that system does not warrant confidence. What we should be doing is ending currency creation by the government sector and shutting down government owned central banks. Essentially we (Australia and the USA) should wind banking regulation back to how it was pre-WWI. We should be letting banks collapse if they fail and prosper otherwise. And if anybody at all should receive government welfare it is asset poor humans who have little income irrespective of whether they are a former bankers, farmers or mechanics.

    I agree with Bobs last comment. Good comment Bob.

  38. sometimes libertarian dogma must give way to real life pragmatism.

    Pommy, you and I must share a gene. Every now and then I agree entirely.

    As Rob says, if libertarian “dogma” had applied, the credit crisis would not have occurred. But since it didn’t, the solution may also not lie in such dogma. Confidence underpins the viability of the financial system, like it or not, and can’t be disregarded. Sitting by and letting the system crash is far worse than intervention so long as the intervention is limited and carefully targeted to get the system back on track.

    Without wanting to hijack the thread, the same reasoning applies to the war in Iraq. From a certain libertarian perspective it might be argued it was wrong to intervene (and would certainly not have been warranted if Saddam had applied libertarian dogma), but bailing out now would be far worse than seeing it through.

    It’s like trying to be a socialist in a capitalist society. You can’t ignore the context. Ideology must give way to reality at times.

  39. Terje, Bob’s last comment was:

    For your kids’ sake I hope you haven’t got your savings in the Australian stockmarket… that is if you have any savings.

    You agree with that????

  40. Bob,

    Why do you think that the correction in global markets is because of “fractional reserve banking” when we haven’t had a business cycle correction (i.e unemployment) or in industrial production as would normally be predicted?

    Bob, fractional reserve banking doesn’t make credit cheap. An intentionally expansionary monetary policy does. I’d probably agree with you that they are politically impossible to decouple.

  41. Okay Bob, tell us how you are going to buy a parcel of land for 10k and when we have hyperinflaiton, I guess you can tell us that you told us so.

    It’s a shame your prediction is “any day now” so we can ignore you if it doesn’t happen within a month.

  42. Terje

    There has been a general welfare transfer from the taxpayer via the Fed (thru currency depreciation) back to the taxpayer (on the basis that taxpayers are also pensioners, mutual fund holders, and workers). net – i dont see taxpayers as any worse off. in fact, they are substantially better off as the alternative is truly scary.

    there has been no specific transfer of welfare to one corporation as the company in question is gone and its employees and shareholders wiped out.

    You are not being pragmatic. we have the system we have. the question is what to do with it when it hits a speed bump. it is another matter altogether to describe your perfect banking system but it just doesn’t (yet) exist.

    To use David’s example, whether it was the right thing or the wrong thing to invade Iraq, that is no longer a relevant question. we did invade Iraq and now we have to pragmatically manage the consequences of that decision taken 5 years ago.

    btw – Are you going to let GMB’s comments on this topic thru moderation?

  43. We don’t have the same level of implicit guarantees in Australia and our banks don’t collapse. It isn’t a question about perfection but of optimising outcomes.

  44. The Iraq war analogy does not work for me so I’m going to mostly ignore it. Lest this become a different sort of debate.

    Doing a detailed CBA on this fed intervention is not within my capacity at this instance. If somebody else wishes to tally up the benefits and costs then that would be nice. However I suspect that the case for intevention is being made somewhat on faith in the wisdom of the fed. I have very little faith in the fed so I’m inclined differently. Try and convince me with numbers if you wish.

    If a bailout of a bank like NAB is a political certainty then there ought to be an explicit additional tax on bank interest. Consumers could then choose to have the tax removed by signing a declaration waivering any government guarantee.

    Out of interest does anybody think governments should intervene when share markets or property markets crash? Why are cash savings more sacred than savings placed in other asset classes? If my gold and silver stocks decline should the RBA help me out? After all I’m a taxpayer also.

    I’m commenting via my mobile phone at the moment. Any worthy GMB comments will have to wait until I can get some personal PC time.

  45. Pom’s right. We have to work with the system we have and the best possible solution was for the fed to take control fo the Bear.
    So offering up grand solutions as to what should have happened in a prefect libertarian world is frankly silly.

    Terje:

    I wanna visit that comment you made earlier about letting the bank go because it only offers assistance to rich people… ie bankers.

    If they had let the bank go, the possibility of a total fracture of the banks system around the world could have been very possible. That’s your cba.

  46. I never said it “only” offers assistance to rich people. I said it offers assistance that also benefits some very rich people. I’m sure a lot of people who work for banks make modest income. And I know that poor people put money in banks. It was in any case a largely rhetorical point. Just as I’m sure your generalised denegration of people with kids in the catallaxy link was no doubt rhetorical.

    I accept that the fed intervened because of a domino theory. I accept that they operated within the scope of their statutory powers and responsibilities. I accept that they didn’t see themselves as having 12 months to do a proper CBA. I accept that what they did was expedient. However the key problem with central banks as I see it is that they behave like central banks. They paper over todays cracks so that things are worse later. Which is why we shouldn’t have them.

    Out of interest who thinks that in the ideal global financial system we should have government empowered central banks with access to a printing press? And if not then who would bail out the failures. Because the nature of capitalism is that in every industry there will always be businesses that fail.

  47. 1.The income earning potential has nothing to do with it. It was either good policy on the run or it wasn’t. This is the sort of crap you end up with on braindead leftist sites. Moreover, Bernanke is considered a world authority on policy response in a deflationary environment so you can argue he’s done a CBA of sorts.

    This is not to defend his actions, but he’s probably done the best he can under the present monetary order.

    2. I was denegrating people with kids? What? You have the right person in mind as I have two of my own? And what exactly has this got to do with the Bear Stearns thread?

  48. JC – both your points are still harping on about my comment on bankers income. I’m not overly interested. It was a rhetorical point that I made in passing. Just as your comment about parents being more keen than most on receiving welfare (which I linked to earlier) was rhetorical. I referenced your comment to demonstrate that we all at times make emotive rhetorical points in articulating our views. You are are right that in formulating banking policy the income of bankers is irrelevant. I’m guilty of hyperbole. Today you are right and I am wrong. I’m a slightly brain dead leftist sympathising communist whatever. I hang my head in shame. Please be merciful.

  49. Mark Hill,

    Only the US dollar is going to be hyperinflated. Our currency will probably be fine, and in fact undergo deflation, due to large amounts of credit being pulled from the market.

    You guys really don’t understand a ****ing thing going on in the world do you? Are you all really of the belief the US economy is still going to exist in any recognizable form 6 months from now? Are you that stupid? Do you even understand the world credit bubble, and the world asset bubble? The fact they are two sides of the same coin?

    This whole asset bull market (more like bullshit market) has been a contest as to who can borrow the most, hang onto an asset for a couple of months, then sell it to the next idiot who borrowed even more. All assets, virtually everywhere in the world, be they paper or physical, are heavily inflated (in some cases 10 or 20 fold). Whoever is left holding these super inflated assets will find their net-worth shrink an order of magnitude when this market corrects.

    There is likely more than 10 trillion in bad debt, which has been lent into every market on the face of the planet. When this debt is unable to be rolled over the assets which back it will be firesaled. As no one can borrow money to buy these assets now, with world interest rates skyrocketing, the assets will go very cheaply.

    You are going to see companies you thought invulnerable go bust overnight. Bear Stearns was the tip of the iceberg. And it won’t stop on American soil. You have a few days, maybe a month, before the payload hits the fan. If you can get over your childish opinions for a moment you might consider saving yourself before you are out on the street. Good luck.

  50. Why will the US dollar be hyperinflated?

    Okay, six months. So you reckon we bwrite call options and buy put options that expire on or after 20 September, 2008. Sweet. I’ll get the account details sorted with Commsec. Short consumer industrials I assume?

    Yes there is hyperinflation. Yes there is asset cycles. But when you print more money, even after bust (as Mises explains why the hyperinflation actually causes depressive activity) you simply need more hard currency to actually buy things.

    Where have you gotten this 10 trillion dollar figure for bad debt?

    I understand we have 3-31 days now to liquidate and get ready for homelessness. Can you explain why rental prices will remain the same?

  51. That the collapse of one major bank can threaten to uncouple the whole financial system is a joke. If the current economic system is that fragile then it is structurally flawed. We simply cannot allow ourselves to be in a position where because of stupidity in one sector of the financial sphere the whole shebang comes toppling down. Hell, its like the blue screen of death: some unknown quantity comes along and messes everything up. Is this the best sort of stability we can hope for in our financial systems?

  52. I’m not going to give you anymore information. I will quite enjoy seeing you lot suffer. You see, I don’t like fake libertarians very much.

  53. You have a few days, maybe a month, before the payload hits the fan. If you can get over your childish opinions for a moment you might consider saving yourself before you are out on the street. Good luck.

    Were you hiding in a bunker somewhere on 31 Dec 99?

  54. John – I agree, although I also think the domino theory of financial collapse is over rated. The idea that a whole string of banks will topple if one customer (Bears Stern) goes under suggests that banks have a monumental disregard for risk and exposure. Image a national road network where every few decades a bridge collapses and in the process it destroys most of the nations roads and cripples the national transport system. In engineering the idea of system stability is a routine consideration and I have trouble believing that the banking sector would be so radically indifferent to the financial equivalent. Personally I don’t think of capitalism as a fragile house of cards.

  55. Bob why would you take delight in other people’s suffering? because they may not agree with your doomsday scenario? that’s a pathetic way to think.

    “If you don’t agree with me, I hoipe you suffer”

    Well I don’t agree with you. ANd you get fuck off with your hope to see me suffer. What a miserable statement to make to someone. Are you that insecure?

    The US has about 30 trillion in unpaid libailities and underfunded committments. They’ll get though it.

    Are you long gold and how much did you lose this week?

  56. If the banking system really is so fragile it sounds like an awfully good case for regulation. Or maybe total deregulation. But guess which one we’ll get.If it’s all such a house of cards I say let it fall. The end result of a total systemec collapse will probably be the loss of all invested funds and the cancellation of all existing debt anyway.

    Bob – What I hate are Libertarians who indulge in the libertarian purity contests. I’m libertarian and you’re not.

    (Except on the Heroin issue. Hear me Pommy, you’ll never be a libertarain while you want to lock people up for doing things that harm no-one – even themselves. Go and whinge about it on Catallaxy if you want…(It’s a problem for me, I start out being ironic, but then get carried away and spoil the effect by getting serious))

    Libertarians will never achieve anything while they can’t unite around better rather then stabbing each other over best. Given by your own admission you didn’t vote LDP because it wasn’t libertarian enough for you, though it had no chance of being elected anyway, and every single other candidate was less libertarian, I don’t think anyone here cares what you think. Go find some US puritan Libertarians and talk about your global financial meltdown with them. But be warned – many of them will have bigger Libertarian dicks then yours.

  57. Tim

    you’ll never be a libertarain while you want to lock people up for doing things that harm no-one – even themselves.

    Huh? when did i say that?

    like you, i do whinge about libertarian pissing matches. but i don’t mind people disagreeing about stuff. as long as it’s done politely (please note, Bob).

  58. Total deregulation actually Tim. The US averted a crisis in the panic of 1903 as international lines of credit were secured from England. The depth of a financial market is the greatest predictor of its stability.

  59. So Bob, on the 21 September 2008 when there is no crisis, I assume you will check into a mental health ward for extreme depression and grief, since we will not be financially ruined?

  60. Jim Rogers: http://youtube.com/watch?v=wXUU_lyb0Lc

    “They are really giving up on the dollar, they are driving the dollar down, they are printing money as fast as they can. Look, the Federal Reserve has just in the last week spent 230 billion dollars taking on loans, house loans, mortgages, out of the system. This man Bernanke was never elected by anybody, I don’t know where he gets the audacity to spend 230 billion dollars of our money to bail out a few friends on Wall St. This is totally outrageous.

    He is next going to be in his helicopter going around the world collecting rent payments from people. Who gave him the authority to do that? To destroy the dollar, to destroy our currency, to essentially destroy the American economy? And, no one ever voted for the man. It is just mind boggling to me.

    And then he gives more money to Bears Stearns so these guys can continue to drive around in their Maserati’s.”

  61. Rob

    Jim Rogers was also telling people to buy the OZ when it was 72 cents because it was heading a lot, lot higher. It’s next big move was down to 48.50 cents.

    Stop listening to people like Rogers who are bascially talking their book…. ie He’s probably short the stock market.

  62. His market advice is irrelevant, and of course he’s acting in his own interests. The facts are still there however.

    The Federal Reserve is expanding the supply of money intentionally to trigger growth. If this does not happen, inflation will ensue (this happened in the 70’s, but China and India certainly change the dynamics of the present situation).

    The Federal Reserve is actively providing welfare to the financial markets, further debasing the American dollar.

    This socialised compensation can now become a catalyst for more banks, brokers and companies to take excessive risk, and make poor decisions in an effort to build profits. If one company is bailed out, why not others?

    In relation to bank failures in Japan, on page 39 of Peter Drysdale’s book “Reform and Recovery in East Asia: The Role of the State and Economic Enterprise” he states:

    “[On deposit insurance] As a result, the DIC began to play a significant role in dealing with troubled banks after more than twenty years’ of inaction. From April 1992 to May 1998, the DIC intervened in twenty-five cases of disposing of troubled banks and provided the banks participating in the bail-out schemes with subsidies of more than 2.4 trillion Yen. In addition, the DIC is to be mobilised in thirty-five future cases of bank failure including Hokkaido-Takushoku…”

    Most importantly he surmises that “the deposit insurance system will be more intensively utilised in future.”

    The Federal Reserves’ basic actions are to provide credit, and most of the above comments tend to believe that should the institution not exist, the market would not be able to work itself out, and ultimately bring down the whole US economy.

    If you look at the US banking crisis of 1907, there was no Federal Reserve to bail out the banks, and it was left up to the market to stave off severe depression.

    As this article briefly points out, it was the banding together of banks that averted trouble.

    http://www.marketwatch.com/news/story/jp-morgans-role-bailout-harks/story.aspx?guid=%7B62A41B26-D222-4582-9043-CFE3A44D7130%7D

    With the Federal Reserve on the scene, it makes it much easier to sidestep a collapse (correction) with corporate welfare. It is this welfare that I thought was against libertarian ideology. To legitimise assistance to any group, institution, association at the cost of another is in my opinion wrong. It is simply organised and legalised looting.

  63. Right. It is looting. But the looting has already manifested itself prior when the money supply was growing.

    Get rid of fractional reserve. And then you can throw the industry open to competition and no more bailouts.

    Its this irrational attachment to fractional reserve that we have to get rid of in order to have sound property rights and a level playing field in this area.

  64. Im with you, They don’t know how to run a business why should the taxpayers help them.Why are the taxpayers being made to pay? None of us had anything to do with these banks being driven into the ground. The bill for this needs to be sent to the entire B-ush administration and every republican and democrat who voted to remove regulations on these finanacial institutions.

    Cheers,
    Dannie

  65. Pingback: Who Will Save Lehman? « Thoughts on Freedom

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