Guardian UK: When BS hits the Fed

[marmar]

When BS hits the Fed
The emergency bail-out for investment bank Bear Stearns was another piece of bad news this week for a US economy that was already in trouble
Richard Adams

March 14, 2008 10:00 PM | Printable version


For outsiders, one of those mystifying pieces of stock market jargon is a "bear market" - one that is falling. Its flip-side is a "bull market" - when the market rises. Today there's a new piece of jargon: a "Bear Stearns market" - when the bottom falls out of the market so far that a central bank decides to push wads of cash through its letter-box.

It's too soon to say how Friday's dramatic events will play out. But the probable destruction of one of Wall Street's better-known brands in the case of Bear Stearns, along with a series of emergency interventions by the Federal Reserve rarely seen since the depression of the 1930s, will echo around the world's financial markets for some time.

It comes on top of a rough week for the US economy as a whole. The debate over whether or not the US is in a recession has become a pointless one. Whatever the technical definition the stream of data coming out shows that US consumers are cutting back on discretionary spending, that house prices continue to plummet and that the financial sector continues to wallow in tar pits of its own making. In that light, the "misplaced optimism of the week" award goes to whoever wrote the splash headline on the front page of today's Washington Post: "Plan aims to restore faith in the economy".

Oh, and the price of oil went up to record levels and sits around $110 a barrel at this week's close of play. Once upon a time that alone would have been enough to keep the market busy for a week.

So - what happened? Banks and modern financial institutions resemble high-wire balancing acts: making the most of their assets requires them to match assets and liabilities (what they owe and what others owe them) alongside liquidity, a phrase that in banking terms means access to ready credit and having assets that are easily sold or lent in exchange for cash should it be required. (Anyone who has had to scrape along between paydays will know exactly what liquidity means.) ...........(more)

The complete piece is at: http://commentisfree.guardian.co.uk/richard_adams/2008/03/when_the_bs_hit_the_fan.html



And check out one of the reader responses to this story:

This shows yet again the fundamental absurdity at the heart of modern capitalism:

Financial institutions claim that they are entitled to a profit for their monetary dealings as reward for the risk that they will lose money.

Yet when they DO, spectacularly, lose money, it is not the financial institution that pays the penalty, it is a central bank (and by implication, everyone who owns US dollars, whose value falls fractionally as more are "printed" out of nowhere).

This is also known as "privatising the profits while socialising the risks".

It stinks.

[malaise]

1. That's a beautiful line

"privatising the profits while socialising the risks".

[marmar]

2. Agreed....Simple but all-encompassing at the same time....

n/t

[jimshoes]

3. For some lively reading

please take in some of the comments in the "Comments" section following the article in the link.

[Mike03]

4. It never fails to amaze me what Wall Street considers "good" news

When the story broke, I knew that this was a catastrophe and that it would most likely trigger a chain reaction of institutions coming forward with bad news. The Fed is paddling water at this point.

There's going to be no more passing the bubble around; the jig is up. This is going to be extremely painful, but we must get the excess liquidity out of the system. It's going to hurt like hell, but any alternative is simply buying time with lies and money-printing.

[marmar]

5. Agreed....The music has stopped and there are no more chairs.

:scared:

[Usrename]

6. The Fed is just erecting another domino to avoid disaster.

They will only slightly delay the effects of disasterous policy.

[nashville_brook]

7. "privatising the profits while socialising the risks" -- i am so totally going to be using this

phrase.