[cube]

There's been a whole lot of cheer leading going on in the mainstream financial news applauding the CB (central bank) aka the fed. There seems to be this happy message being delivered to the mass public which basically says the fed is going to "rescue" the market. That is impossible and here's why:

Suppose there is a factory that produces widgets! During the good years a bunch of investors got overly excited and constructed more widget factories than society has a need for. Now there is an over-supply of widget factories. If the supply is excessive then the price must go down. All across the land widget factories are sitting idle and owners are going bankrupt.
What can the "fed" do?

1) lower interest rates - this may reduce a factory owner's monthly loan payments (hopefully avoiding loan default) but that still does not change the fact there's an over-supply of widgets.
2) swap out the bad for good - maybe these widget loans were packaged into bonds and sold off to clueless investors. The fed can "give" $200 Billion to investors in "exchange" for these toxic widget backed securities or whatever it's called but that still does NOT change the fact there's an over-supply of widgets.
3) a $30 Billion sweetheart loan guarantee to a favored corporation - same end result. Everybody all together now----> that still does NOT change the fact there's an over-supply of widgets.

So long as the population continues to increase all those empty houses will "eventually" get filled. People have to live somewhere right? The market will correct itself. It does not need "help" from the fed. The power elites cannot solve anything; they can only "redistribute wealth" if you know what I mean! I think it's unfortunate that Joe Sixpack cannot see that he's being taken for ride. But hey that's not my problem I see a potential for profit.

[seldom_seen]

$this->bbcode_second_pass_quote('cube', 'S')o long as the population continues to increase all those empty houses will "eventually" get filled. People have to live somewhere right?

[dohboi]

Cube wrote:

"There's been a whole lot of cheer leading going on in the mainstream financial news applauding the CB (central bank) aka the fed. There seems to be this happy message being delivered to the mass public which basically says the fed is going to "rescue" the market...
I think it's unfortunate that Joe Sixpack cannot see that he's being taken for ride."

That's the sad (or if you have a twisted sense of humor, funny) thing: we're instructed to cheer as we get f'd in the *ss w/o lube. (Pardon the crudity, but the reality is far cruder and more destructive than the off-color metaphor.)

Hundreds of billions (no doubt reaching trillions soon) of taxpayers money being flushed down the toilet (exchanged for toxic mortgage-backed securities), and we're told that we should be rejoicing, that this is our great salvation.

Sweet mother of god, you couldn't make this stuff up. If someone had written a futuristic novel with this happening in it a few years back, everyone would have said it was too wildly improbable, that everyone would rebel, that our government wouldn't let this happen...

Yet here it is, with barely a whimper from the populous and may a cheer from the punditry.

Merry Easter to all, and to all a good night.

[heroineworshipper]

The fed is powerless at making capitalism viable. As a means of promoting socialism, it's a resounding success. Just look at all the federal bailouts & free credit being awarded these days & the prosperity that free money for all has brought to the stock market. No-one has to do anything. Stores only need 3 hours of business. No-one has to invent anything. Shoddy work is good enough. Just borrow more than your means & get a federal bailout. Web 2.0 forever.

[Colorado-Valley]

The Fed could hire out-of-work construction workers to tear down millions of vacant houses, creating an undersupply and thus solving the housing crisis.

Easy ...

[mefistofeles]

Although I disagree with the Fed's moves, for the short term at least, they've done a superb job of restoring confidence to the market. Don't get me wrong as someone who invested alot in oil just before the Bear Stearns bailout I was affected somewhat negatively by their actions.

However I agree with the consensus on this website in general that from a long term perspective the Fed is only making things worse.

Aside from peakoil its a basic characterisitc of moral hazard outlined in the book: Too Big to Fail .

In effect what regulators have done is subsidize dangerous or risky market players to the detriment of safer or more conservative players. I.e. Bear Stearns, with its heavy exposure to mortgage backed securities.

What this means is that risky players pay lower interest rates than they should in a "natural environment".

However at the end of the day the law of the jungle still applies. The weak and infirm can only be kept going for so long and the means to support them become ever more elaborate and onerous. Think of if as comedy, expect applied to economics.

The Fed must take ever more drastic measures to support these firms through ever higher levels of intervention. Think of a junkie developing a tolerance for a drug, you need more just to get the same "hit".

Like anything doing too much coke or having too much monetary stimulus will create a dangerous situation. In the US I think its going to be Weimar style inflation or even sudden social collapse.

Although I'm not much of an ecologist or environmentalist I do know this. That if the Fed subsidizes risky behaviour all the members of a particular class are quite likely to engage in it creating more problems. This in turn creates ever larger needs for monetary stimulus in turn creating a huge flow of dollars into the world's financial system. There are only so many dollars the world can safetly handle before the whole system engages in drastic corrective behaviour.

A run on the dollar is inevitable, especially with Fannie and Freddie (or Fanron as bill Fleckstein put it) facing similar problems to Bear Stearns (on a much larger scale I might add.)

[gampy]

Whether the Fed is powerless really depends on who is pulling it's strings, and the actual motives behind it's recent actions.

Bear with me here:

The US is in a presidential election year. The economy, and US dollar is tanking. Iraq is still the quagmire it was 2 years ago. The Office of the Comptroller of the Currency (part of the Treasury that deals with banks) is a Presidential appointee.

The Fed's actions are not designed to save the economy, but to keep it propped up until after the election. No way do they want a meltdown before November 2008. McCain needs at least the appearance of a functioning economy to win. The Treasury and the White House were all involved with the Bear Stearns deal. They don't want the sub-prime paper marked to market. Yet.

So far...the plan seems to be working. The deal with Bear Stearns staved off the mark to market of the toxic paper. The opening of the discount window to other entities will keep the wolves at bay for a few months (so they hope).

I think it is naive to believe that the actions of the Fed are free of political considerations, or political control.

Ben has a master, or 2 or 3. Question is, which one is pulling the leash at the moment?

The Republican party, I would guess.

[Gerben]

$this->bbcode_second_pass_quote('gampy', 'T')he Republican party, I would guess.

[gampy]

$this->bbcode_second_pass_quote('Gerben', '')$this->bbcode_second_pass_quote('gampy', 'T')he Republican party, I would guess.

[Atlantean_Relic]

$this->bbcode_second_pass_quote('gampy', '')$this->bbcode_second_pass_quote('Gerben', '')$this->bbcode_second_pass_quote('gampy', 'T')he Republican party, I would guess.

[cube]

$this->bbcode_second_pass_quote('mefistofeles', '.')..
However at the end of the day the law of the jungle still applies. The weak and infirm can only be kept going for so long and the means to support them become ever more elaborate and onerous. Think of if as comedy, expect applied to economics.

The Fed must take ever more drastic measures to support these firms through ever higher levels of intervention. Think of a junkie developing a tolerance for a drug, you need more just to get the same "hit".

Like anything doing too much coke or having too much monetary stimulus will create a dangerous situation. In the US I think its going to be Weimar style inflation or even sudden social collapse.
...

[Pretorian]

$this->bbcode_second_pass_quote('Atlantean_Relic', '')$this->bbcode_second_pass_quote('gampy', '')$this->bbcode_second_pass_quote('Gerben', '')$this->bbcode_second_pass_quote('gampy', 'T')he Republican party, I would guess.

[smallpoxgirl]

In your analogy, yes the fed is powerless to keep extraneous widget factories open. The question though is why do we want to keep those factories open? Admittedly, it may cause some economic hardship to the widget workers who have to get retrained to make some other product, but if there are too many widget factories, some of them should fail. That's not a bad thing.

Granted, I think the employees of Bear Stearns should be allowed to roll the executive staff in broken glass and then pelt them with citrus fruit. That not withstanding, companies make stupid decisions and fail ALL THE TIME. It's not a bad thing.

If people bought overpriced houses and lost equity, I'm sorry for them, but there is no particular imperative to pretend that a house is worth more than it's worth.

The only bad I see here is that the fed is sucking up all this bad debt from the stupid decisions people made, and we are all going to end up on the hook for it.

[mmasters]

$this->bbcode_second_pass_quote('smallpoxgirl', 'T')he only bad I see here is that the fed is sucking up all this bad debt from the stupid decisions people made, and we are all going to end up on the hook for it.

[mefistofeles]

$this->bbcode_second_pass_quote('', 'T')he Fed's actions are not designed to save the economy, but to keep it propped up until after the election. No way do they want a meltdown before November 2008. McCain needs at least the appearance of a functioning economy to win. The Treasury and the White House were all involved with the Bear Stearns deal. They don't want the sub-prime paper marked to market. Yet.

[MrBill]

The Fed is powerless to the extent that the problem of global imbalances and the shadow banking system based on derivatives is many times larger than the central bank's reserves. And the only resources the US government has to throw at the underlying problems rely on borrowed money that further exacerbates those global imbalances.



There is no silver bullet this time. And we still have a long way to correct until we are deleveraged and balance is restored. Ironically - despite current economic problems - when I see companies like Monsanto with a P/E of 55x or Mosaic with 46x - and still rising - I think to myself that investors are too stupid to be saved from their own foolishness no matter how much oversight you give regulators. It would be better not to have any. Caveat emptor! ; - )

[cube]

$this->bbcode_second_pass_quote('MrBill', ' ')- I think to myself that investors are too stupid to be saved from their own foolishness no matter how much oversight you give regulators.