Fed bail-outs will not keep the financial ship from sinking but let them try

This author makes the case for the Fed’s bailouts but he also makes it clear just how close we are to another great depression.

What is not talked about is the greed that got us into this mess. The Fed can try to bail out this sinking ship but even if it does temporarily keep it afloat it cannot stop the ship’s rotten timbers from leaking like a sieve. The ship will take on more water when the next tempest hits.

There are over $400 trillion in derivatives out there backed by almost nothing. If the banks and brokerages have to come up with real money to cover losses on this gambling debt there is not enough money in the world to stop the economic collapse.

For decades the banks and brokerages have been living like fat cats off of a derivative pyramid scheme making bets of 100 to 1 that property would continue to increase in value. They paid out high dividends on their gambling winnings and left nothing in the bank to cover future losses. Now this author suggests that as property values drop and these gamblers cannot cover their own losses that the Fed should cover their losses until property values start going up again. Maybe that is the only solution to keep out out of a great depression but of course if they know that taxpayers will bail them out when they are on a losing streak they will even be more reckless with their gambling in the future.

The Fed may have to do so much bailing out by creating more and more dollars that it will make hyper-inflation certain. That inflation could have the same financial impact on individual Americans as would any depression.

The truth is that almost everyone in the Western world has been living for decades beyond their means and now the bills are coming due. The economic system is going to crash and only after most assets and debts are wiped out can a new system be set up. Let them try to keep the world financial ship afloat as long as they can with their bucket brigade bail outs but the storm always eventually comes and this rotten ship will go to the bottom.

Sooner Fed bail-outs than the 1930s revisited - Telegraph

The crisis has since spread to prime mortgages. Fannie Mae and Freddie Mac - the fortress agencies that guarantee 60 per cent of America’s $11 trillion mortgage market - began to crumble last week. Even bodies standing at the top of the credit system are no longer deemed safe. As Barclays Capital put it, this was a “tsunami event”.Or in the words of City veteran David Buik at Cantor Fitzgerald: “No one in living memory has ever seen a banking crisis like this. I am older than God, and the outlook has never looked as bleak.”

Any smug assumption that this will remain a local American affair may soon be confounded. The IMF has abruptly changed its tune. “Obviously the financial market crisis is now more serious and more global than a week ago,” it said on Monday.

Property booms will soon be deflating across the Anglo-Saxon world and the eurozone’s Club Med belt. Japan is already on the brink of recession. Debt levels are higher now in most rich countries than they were in 1929. The levels of financial leverage are greater.

As the Bank for International Settlements wrote last year, we are more vulnerable to a 1930s dénouement than people realise - should the authorities botch the response.

Like some other free-market bears, I now find myself in an odd position. For years we castigated the central banks for inflating a reckless credit bubble by holding interest rates too low. Now we have flipped. We are on the other side, defending monetary stimulus, even defending the state takeover of Bear Stearns debt.