Federal Reserve Bernanke Dancing With Bear
While the Bear Stearns story is still unfolding it is obvious that the Federal Reserve Bank and Chairman Ben Bernanke have thrown caution to the wind and are now dancing with the Bear.
They are also dancing with a hot, really enraged, A group of shareholders who are claiming rape and who are wondering, with good reason, how they could have been practically wiped out in record time. From a high of over $170 a share only last year the generous price set by the Fed and JP Morgan for Bear Stearns was all of $2.00 a share.
Last week’s “buy out” of Bear Stearns really highlights the severity of the the possibility of a complete monetary system collapse. And not just by the investments banks, brokerage firms, and commercial banks but by the US Federal Reserve.
In order to induce JP Morgan to “buy” the Bear the Federal Reserve offered $30 billion dollars of taxpayer money to protect Morgan from nasty Bear portfolio surprises. No doubt here will be some in there as at $2.00 a share the Bear subprime “assets” must be toxic waste of the worse sort.
The Federal Reserve then did something totally unprecedented. The Fed, under Ben Bernanke’s throw the money from helicopters direction, made the same overnight lending facilities available to the brokerage firms as are available to the banks.
And the collateral for these loans? Why of course it is the impossible to evaluate toxic waste subprime paper that can’t be sold or even evaluated anyplace else. In effect the Fed has become the dumping ground for all of the contaminated near worthless paper that no one else will touch.
====== As Stated by the Taipan Publishing Group ====
As a result of all this, the Federal Reserve has picked up a new nickname — the Yucca Mountain of subprime.
For those unfamiliar, Yucca Mountain is a proposed dumping site for America’s nuclear waste. Most states are in favor except Nevada, where Yucca Mountain forlornly sits. Las Vegas is particularly less than thrilled at the prospect of a toxic tomb just 90 miles away.
Thanks to political opposition and technical problems, Yucca Mountain isn’t expected to open for business until the year 2021 (if even then). But the Federal Reserve version, as we have seen with Bear Stearns, is open for business right now. Subprime gunk has proven too toxic for Wall Street to handle, and there is just nowhere else to put the stuff.
As Wall Street’s books grow ever more radioactive in the minds of investors, the Fed will have no choice other than to continue its stealth nationalization program. The only way it can do that is by printing more dollars throwing good money after bad until the madness finally stops.
======= To Read the Full Taipan Publishing Group story =======
Where all of this madness is leading us to is any one’s guess. My own guess is that it will be disastrous over the long run. The long run these days being a month or two or three. The Fed has in effect nationalized Bear Stearns and opened the door wide to being the dumping ground for trillions of dollars of toxic waste all but worthless paper which it calls security.
Ha! Events are heading in the direction of being so bad that brokerage firms and banks will be able to exchange toilet paper for US treasuries before it’s all over. Of course, by then no one will want to touch the treasuries either. They will demand gold. However, there is the slight problem that the US treasury only has a tiny amount of gold which it no longer is required to exchange for anything.
The entire crazy fractional system of banking is under so much stress that no wonder the Fed is operating in a panic mode. It is possible the entire paper card house financial structure will come tumbling down with just one misstep.
In trying to deal with the issue the Fed is taking on an unknown and impossible to quantify level of risk. The amount of derivatives created by the Wall Street financial engineers is in the many trillions. It is a number so big that even if we could exactly identify it we still couldn’t understand it.
The number is simply too big.
In trying to save the guys who largely made this mess the Fed may be in the process of sacrificing itself. The Fed actions in the end have a good chance of making a bad situation even worse. Hang on tight, it’s going to be a rough ride.
And where does the dollar and the forex markets fit into all of this? After a brief rally for all of the wrong reasons, like there was “only” a 75 basis point rate cut instead of a full one percent cut, the dollar has a strong possibility of going south in a big hurry as forex traders the world over take a closer look at the consequences and implications of the Fed actions.
As forex traders begin to understand what a risky slope the Fed is on who will want to hold dollars? As the Fed throws more and more of them out of the helicopter window and each dollar has less value the risk of complete turmoil and hyperinflation grows.
As long term residents of Alaska can tell you it is dangerous to dance with bears, especially when they have a last name and dress in expensive suits.
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