The fed are acting stupidly.

[BenBurch]

It would have been MUCH better in the long run to allow Bear to fail and take the pain now than to pump in more stimulus now.

As we can see the stimulus isn't even stopping the plunge.

This is like a damaged submarine madly backing engines and blowing ballast to halt its plunge to the bottom; The rate of fall might slow, but Davy Jones' Locker is still waiting.

I would not be surprised given this course of policy to see the fed rate at zero by September.

 

[Francesca R]

I disagree with your OP. I think it is better to effectively allow Bear Stearns to trade at a negative value (courtesy of JPM Chase), which is what I assume it will now do, rather than allow it to stop trading and shower its losses around indiscriminately among those who it owes money to.

If/when confidence returns, banks / companies that have failed will not come back to life.

This way it can be downsized, assets can be disposed of with less of a fire sale, and ultimately the external damage will be less (but not eliminated).

 

[kallsop]

It would have been MUCH better in the long run to allow Bear to fail and take the pain now than to pump in more stimulus now.

Businesses making bad decisions should be allowed to fail, but it's an election year and it appears the Congress and Federal Reserve Bank will do just about anything to smooth out the bumps. Bailouts by foreign investors are happening too e.g. Citibank.

Enjoy 2008 and hope the oil speculators go bust before 2009.

 

[BenBurch]

And now for a Musical Interlude;

We'd like to thank you, Herbert Hoover
(lyrics from the musical "Annie")

[ALL]
Today we're living in a shanty
Today we're scrounding for a meal

[SOPHIE]
Today I'm stealing coal for fires
Who knew i could steal?

[MEN]
I used to winter in the tropics

[WOMEN]
I spent my summers at the shore

[FRED]
I used to throw away the paper--

[ALL]
We'd like to thank you: Herber Hoover
For really showing us the way
We'd like to thank you: Herbert Hoover
You made us what we are today

Prosperity was 'round the corner
The cozy cottage built for two
In this blue heaven
That you
Gave us
Yes!

We're turning blue!
They offered us Al Smith and Hoover
We paid attention and we chose
Not only did we pay attention
We paid through the nose.

In ev'ry pt he said "a chicken"
But Herbert Hoover he forgot
Not only don't we have the chicken
We ain't got the pot!
Hey Herbie

[WOMEN]
You left behind a greatful nation

[ALL]
So, Herb, our hats are off to you
We're up to here with admiration

[SOPHIE]
Come down and have a little stew

[ALL]
Come down and share some Christmas dinner
Be sure to bring the missus too
We got no turkey for our stuffing
We'd like to thank you, Herbert Hoover
For really showing us the way
You dirty rat, you Bureaucrat, you
Made us what we are today
Come and get it, Herb!

 

[Francesca R]

Businesses making bad decisions should be allowed to fail

Bear Stearns' previous owners will lose almost everything. Its key executives will too. Saving them $2 per share is not exactly a rescue for them. That they "fail" is not the issue, the solvency of the financial system is the issue.

it's an election year and it appears the Congress and Federal Reserve Bank will do just about anything to smooth out the bumps.

I don't think it matters about the US general election. In the UK Northern Rock was not allowed to fail (but again, the shareholders lost almost all they invested) even though a UK election need not happen until 2010.

 

[Walter Wayne]

Businesses making bad decisions should be allowed to fail, but it's an election year and it appears the Congress and Federal Reserve Bank will do just about anything to smooth out the bumps. Bailouts by foreign investors are happening too e.g. Citibank.

Enjoy 2008 and hope the oil speculators go bust before 2009.

Why are the foreign investors bailouts happening? Surely they aren't concerned about it being an election year, or smoothing out the bumps out of selfless charity.

Walt

 

[BenBurch]

Why are the foreign investors bailouts happening? Surely they aren't concerned about it being an election year, or smoothing out the bumps out of selfless charity.

Walt

On that score;

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/17/ccview117.xml

As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."

The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.

If we can no longer move paper, we are in Wiemar Germany.

-Ben

 

[Francesca R]

On that score

foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

If we can no longer move paper, we are in Wiemar Germany.

30 year US treasury yields are close to the lowest that they've ever been, and that's at a time that inflation is high relative to the last few years. I simply don't accept that there is any vote of "no confidence" in the US government. It's a nice sensationalist story but it doesn't fit the evidence.

Currency markets are inherently unpredictable and defiant of logic, but there is nothing odd about the US dollar being very weak right now. I would not be surprised to see the dollar at much stonger levels in a year or two's time.

BTW--I think Walter Wayne was referring to the recent stories of sovereign wealth funds of middle-eastern and SE Asian governments buying large stakes in western banks like Citigroup and UBS (Swiss)

 

[JoeEllison]

It would have been MUCH better in the long run to allow Bear to fail and take the pain now than to pump in more stimulus now.

As we can see the stimulus isn't even stopping the plunge.

This is like a damaged submarine madly backing engines and blowing ballast to halt its plunge to the bottom; The rate of fall might slow, but Davy Jones' Locker is still waiting.

I would not be surprised given this course of policy to see the fed rate at zero by September.

The real problem is that they've been propping up a failing economy for a few years, I guess to allow Bush to pretend that he hadn't screwed up EVERYTHING. The problem is, instead of having a decent-sized slump in 2004 and a recovery by now, we're looking at an avalanche in the next year or two... one that the next president, if they are a Democrat, will immediately be blamed for. More Republican "personal responsibility"?

 

[Francesca R]

The real problem is that they've been propping up a failing economy for a few years

The US is a failing economy? OK--which economies are succeeding?

 

[Magyar]

you know again and again we hear from all the HEROIC capitalists that govt. is EEEEVIL and that it shoud not regulate business because telling people how and how much money they can make is worse then killing babies.

Yet, like in the S&L cricis it is again the same group of fat cats making up ALL kinds of reasons why the govt. should bail them out to "protect" the financial isntatutions.

The real problem is that the vast majority of the people responsible for these greedy, short sighted, profit driven everythinhg else be damned "business preactices' are never held accountable. When the Sh8 hits the fan they, through the croneys they elect, pass the buck on to the tax payer.

 

[Francesca R]

It would have been MUCH better in the long run to allow Bear to fail and take the pain now than to pump in more stimulus now.

Here is The Economist's leader on the Bear Stearns rescue.

Bear is a counterparty to some $10 trillion of over-the-counter swaps. With the broker's collapse, the fear that these and other contracts would no longer be honoured would have infected the world's derivatives markets. Imagine those doubts raging in all the securities Bear traded and from there spreading across the financial system; then imagine what would happen to the economy in the financial nuclear winter that would follow. Bear Stearns may not have been too big to fail, but it was too entangled.

[ . . . ]

No doubt, there are many ways in which financial regulation needs to be fixed; but that is for later.

 

[CriticalThanking]

In addition, dumping all of BS's mortgage-backed assets into the market would make the attempted sales of others even worse. It is hard enough now to package loans and sell anything but prime A-paper.

CT