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Tuesday, March 18, 2008

Sick, But-

My guess is 50 bps. The Fed is going to go way low on rates, but it cannot afford to get there too soon.

This yammer about the Fed "bailing out" Bear is ridiculous. The Fed handed the loss to the shareholders. Nor are the loans inflationary. The amount of value destroyed for Bear's shareholders offsets any minor inflationary effect. A whole bunch of people were wealthy on Friday, and poor on Monday.

There is major agony amongst the financial class. It's the equivalent of the French Revolution.

I have concluded that we are in economic silly season, because most of the analysis I read doesn't make much sense. I know I owe you an explanation of inflation, but I woke up with the beginnings of a bad cold and I'm going to get as much rest time as possible today. We're fighting deflation, not inflation.

I look forward to your feeling better, especially since I am interested in your thoughts on inflation/deflation.

WIth food prices increasing rapidly, and energy prices continuing a sharp up trend, I don't see how inflation is avoided. Not to mention the fed pumping in many dollars probably overvalued relative to what is put up as collateral.

Granted, there are also major deflationary forces that are probably coming to bear. But I see what look like clear inflationary forces too, so think it will be a seesaw.

Therefore interested in your take.

Granted, there are going
I'd think that inflation/deflation may be relative.

Our economic betters get financial deflation as bubbles collapse and strange financial instruments are marked to zero.

While the economic lessers get to pay more for milk, bread and gas.

At some point our economic betters will come to the conclusion that consumers are like a natural resource, you cannot keep on exploiting it without consequence. Consumers must be protected and provided means to increase.
Regarding Bear Stearns. It definitely WAS a bailout.

The fed guaranteed the value of $30 billion in assets to get this deal done. Equity holders took losses, but bond holders and counter parties were spared losses and guaranteed 100% return of principal and payment of interest. The bail out was also done against the unprecedented back drop of the fed lending directly to broker dealers (including lending treasuries against assets of questionable value).

The fed has sponsored so much leverage in all parts of the market for so long, they clearly feel they have no choice but to take extreme measures.

Again, growing the aggregate numbers for the sake of it is senseless. I don't see how growth for the sake of growth leads to prosperity. Especially considering the distibution of income trends.

BTW, the $150 billion tax rebate plan IS a bail out also.

Good points. I see deflation for the wealthiest 10% of the population and inflation for remaining 90% of the population. Bad news all around.
MoM,do take care of yourself,your insights are valuable.I find your reference to the French Revolution apposite,the social disruption caused by these events will be massive.I do see a substantial difference in that the wealthy and powerful are being affected substantially.This sysem is supposed to work FOR them,not against them,and they both vote,and have influence disproportionately.The poor expect a screwing,the middle and upper classes have a sense of entitlement which has been nurtured for decades.There is a growing anger,and I believe this will result in profound changes in our society.Oddly,I am hopeful about these changes over the long term.God Bless,and give my best to Jay and Cheryl,Tom.
Regarding Bear Stearns. It definitely WAS a bailout.

The fed guaranteed the value of $30 billion in assets to get this deal done. Equity holders took losses, but bond holders and counter parties were spared losses and guaranteed 100% return of principal and payment of interest.

The people protected were those for whom Bear Sterns was acting as an agent. The stockholders were reamed, and many employees will be out of work. Those whose business decisions brought this about should take the worst of it, but there probably isn't enough of them to get all the skin that has to be taken.

I don't see how growth for the sake of growth leads to prosperity.

That depends what you mean by "growth for the sake of growth." If you mean increased share valuations with no production beneath them, then the benefit is limited. But if it represents actual growth in productive capacity, then there are more goods and services to be bought. And unless those are going into inventory, people are buying them, which means they are satisfying needs and wants and are, presumably, better off--more prosperous.
Vader - nice distinction on the varying impacts. Actually there multiple coils here. When I'm less stupid I'll at least define my terms, and then we probably can talk more efficiently. Inflation is a word used to describe multiple phenomena.

MAB - the rebates are a stimulus program, but are they a bailout? A bailout usually describes rescue of a certain entity or class of entities.

ALL - My body's response to a cold is quite often to react as if it is countering bubonic plague along with bird flu. Thus colds rarely last more than a day, but they lay me out. I should be back in commission tomorrow.

I do find it ironically just that the financial empire-builders are now having their own depression. That is actually what a professional money guy told me yesterday - that it was a depression.
Mama, as an aside: Did you watch Obama's speech today? If so, what did you think?
I'm still not sure how the IRS giving me back my money is a bailout. And keep in mind, for those who owe taxes, they will get to use the stimulus checks to pay off what they owe.
The wealthier among won't suffer.

Anyone with a clue knows the score re " bailing out" the financial crooks & their firms.

Must be serious repercussions for what these two legged animals have heaped on this country.

These crooks will have to be stripped of assets and put out on islands as we should have done long ago to keep the system more honest.
(as all dangerous riminals[separate islands same for those don't want to work to support themselves ])

All will have to be reduced with a return to basic living as the solution.

Hope you feel better and take care.


As of 11/30/07, Bear Steans had $289 billion of short and long term debt. The debt was selling at various discounts to par prior to the fed backstopping J.P. Morgan and the take under. Total equity loss was less than 10 billion (depending on the date used for the stock price). In a bankruptcy, the debt holders would certainly get far less than 100% on the dollar. In a panic, the prices would be unthinkable.

Without the fed's guarantee, Bear's debt would have set marks that would have necessitated the Fed to lower the carrying value of many of the so called AAA assets on its own balance sheet. This would have required margin calls on the TAF, etc. Think cascading defaults.

There is so much leverage in the system, Bear literally was euthanized and assumed by the FED in order to preserve the system.

One for the history books.
Whether the Bear action was a bail-out depends on your opinion of what level of maturity mismatch is desirable. The problem with an uncontrolled unwind (cascading fire sale) is that it blows up both bankrupt companies and companies whose maturity mismatch exceeds some threshold. Blowing up the latter companies simply for running a mismatch—and it wouldn't take an extravagant mismatch during a total meltdown—seems rather wasteful. (And potentially suicidal if it turns out the threshold is so low that the surviving economy is no longer self sustaining. Does anybody seriously want to run the experiment to find out where the limit lies?)

As far as I can tell, the Fed is trying to slow down the unwind so that the salvageable companies can be salvaged. As a bonus the survivors get to spend several hard, profitless years dancing on the edge of a knife, an object lesson that would not be learned by simply pushing their reset buttons.

I do not think Bear's customers were such a big concern. If it was simply a matter of keeping the clearing and settlement functions going, couldn't the Fed have simply written a cash loan to keep them going until a buyer was found? Even an outright grant would be less than the rounding error on what they actually did.
MAB, that's exactly what I have been trying to convey.

Daniel, it is counterparty risk. Bear could not meet its obligations. It was a huge derivatives player, and it was going to fold. The result would have bankrupted a chain of companies.

The Fed's action is said to be "unprecedented", but it really isn't. What the Fed did was to use its power to treat a member of the shadow banking system as if it were a collapsed bank. There was no better solution.

The stability of the banking system is deeply involved now with companies which have a much looser rein than banks. Since the Fed had to cover, the Fed needed to execute the offender.

I said before, we can't afford to bail these guys out. We have to fold them and patch the holes they leave behind. Believe me, this is striking terror in the hearts of the big-time financial world.
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