Friday, 03.14.08
Liquidity Trap
Photo by flickr user zak_greant under a creative commons license
Bear Stearns, the smallest of New York's bulge bracket banks, has been the hardest hit by the subprime crisis, and speculation about its balance sheet has been floating for months. Liquidity problems in credit markets have made things worse. This week, worries turned to fears, as rumors made other financial institutions reluctant to do business with the ailing bank. In finance, expectations -- even false ones -- can rapidly become realities: If no one will loan you money or trade with you because your firm might go under, your firm will go under.
J. P. Morgan, which unlike Bear can borrow directly from the Fed's discount window, is taking a short-term loan from the Fed and re-loaning the money to Bear. They hope this will let Bear Stearns hold things together long enough to find permanent financing or -- more likely -- auction itself off. Bear Stearns, however, suffers from the same problem that is plaguing credit markets: since no one knows what many of its assets are worth, it's hard for either buyers or sellers to put a price on the firm.
The terrifying speed of Bear's collapse has stunned investors -- less than ten days from rumor to ruin. Investment banking stocks plunged on the news, particularly Lehman Brothers, which like Bear Stearns, has relatively light cash reserves and a heavy exposure to the debt markets. If the bank's sudden collapse shakes confidence in other institutions, more such situations will surely follow, and Bear could be the first domino in a long line.
'It ran out of money'And that's bad news, if you're a bank, writes Felix Salmon. |
Waves of uneaseThe New York Times worries that unease will ripple through the financial markets, upsetting sound and unsound institutions alike. |
RecriminationsHenry Blodget points a finger at Bear Stearns's leaders, Alan D. Schwartz and Jimmy Cayne. |
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Ms. McArdle:
A story about a Barack Obama's pastor's political rants: 200 comments.
A story about the role of the Fed brokering the rescue of one of Wall Street's largest firms because regulators are scared about the fallout: 1 comment.
Why? NO excessively simple diagnosis, and no a identifiable villain.
Megan,
What rate did Bear Stearns borrow this money at? Isn't this a bailout?
Steve, the rate is irrelevant, the horse has left the barn, the Bear is dead.
My understanding is that there is a significant difference between Bear Stearns and Lehman. While both are purely investment firms, and so can not borrow from the Fed, Lehman has in recent years put a strong emphasis on risk managment, while Bear Stearns has a rep for taking on much higher risks than most firms. From what I have read, Lehman already closed out most of their riskier debt market related positions over the second and third quarters of 2007, and significantly reduced their overall exposure to debt markets even in less risky positions. I think the affect on Lehman is more a case of investor panic than anything else.
I think some people are scared to death by this and don't want to talk about it, and the rest are bored, and don't want to talk about it.
I think it is deadly serious. We should know from history how far economic troubles can go toward making our lives miserable. We're pretty smug in this day and age about all the modern mechanisms we have for controlling the economy. We are, however, still as irresponsible as we were in the past. If we are smarter it doesn't really matter much. The economy has become so much more complex that our collective economic IQ has not increased enough to make a difference. When the dominos line up and somehow cause a disaster, everyone will say in retrospect how obvious it was what was going to happen. Why didn't we do something?
I wish we had a Department of Doing Something Before the Fact.
JJ Mollo:
The right wing employs religion to incarnate its doomsday superstitions, while the left wing resorts to economics. I would suggest reading a few economics courses before you comment.
Economics and Finance are not subjects such as English literature, in which any asinine comment has merit.
Mr. del Valle's comment was quite smug and arrogant
In this case, it's not a matter of Doing Something Before the Fact. It's about Not Doing Something Before the Fact. Which in this case, means Not Making Stupid-Ass Loans to Morons, and Not Compensating Mortage Brokers Based Purely On Volume.
Unfortunately, when you have a bull market in morons, you have a bear market in brains. The two asset classes are negatively correlated. And the brains of loan officers and risk management dweebs are, alas, included in the former group.
Add to that bonehead CEOs, who are terrorized by their boards into chasing short-term earnings, rather than pursuing long-term prudent policies, and therefore forced into making the same dumbass loans everyone else is. If they didn't imitate their dumb peers, they'd be fired, and replaced with someone who would.
And so shareholders get the returns they deserve.
In jj mollo's defense, he's right - right up until the time where he said "we need a Department of Doing Something Before the Fact."
Hmmmm...looking at that one statement carefully, though, del Valle is right about that: That's one of those things that sounds insightful to liberal twits, but is really very vapid.
I'll play, Luis A. del Valle: The problem is the US Fed and central banking system, obviously. This is the mess Greenspan made.
As to your placing economics on the top intellectual shelf, I believe it was economist JK Galbraith himself who observed that "the only function of economic forecasting is to make astrology look respectable".
And as a follow-on to the political angle, the amazing thing about the fiat US dollar to me is that it's the ostensible conservatives hoorahing the entire mess forward, willfully confusing bubbles with growth.
If there's a place on the circular political continuum where the paranoid anti-government Left and small-government Right meet, it should and must be here. The US paper dollar is hereby a disaster.
Remember when the pound sterling was demoted? Don't think it's not going to happen with the dollar, Republicans. And don't think another comforting layer of dollar-fueled Socialist policy is going to work, Democrats.
With Wall Street looking more and more like the wheels are about to come off, and with the Fed's only remaining option being to chase down to 0% interest ala the 80's Japan, the system is already looking a lot like positive feedback.
Either way this mess is just starting.
"Mr. del Valle's comment was quite smug and arrogant"
Perhaps - but what he said was correct (which is far more important than how he said it). I thought his comment was very sharp. Keen mind.
The masses (as well as the politicans) are extremely ignorant re: economics - yet that doesn't stop them from commenting and pretending that they know what they do not. (Most politicians have never had a real job - so how could one expect them to grasp economic fundamentals?)
It's amazing to see the level of fear and pessimism. I think it has more to do with perfectionism and other psychological factors effecting the citizenry rather than the financial realities. I see similarly skewed interpretations of the Iraq mission.
e.g. When did recession become the end of the world? Listening to the media, you'd think it was armageddon, and that unemployment was running at 15% and inflation at 20%! Is congress going to outlaw recessions and any other undesirable (yet necessary) financial circumstance?
Not to minimize the very real problems, but can we get a grip people? Tremendous growth of the world's so-called emerging markets combined with huge upcoming technological advances leads me to believe we are headed for extremely prosperous times in the coming decades. But that requires looking ahead by more than a few minutes, something it seems that most peopel can't handle these days. I think the average holding period for stock has become a week? ;) (Is it any wonder that value managers like Buffett outperform?).
Sing with me! "It's the end of the world as we know it...."
Is there anything ordinary folks can do?
Manufacturing companies have, at their core, a primary risk: no one buys their products for what they cost to make, or even at all. they have many ways to cope with this: add bells and whistles, change their cost structure, change the basic nature of the product....
financing companies have a much less complex primary risk: that their access to financing is impeded. As long as they have access to money, and have the wits to sell product above their core funding rate, they will kepp the doors open.
Bear Stearns suffered a run on the bank. No amount of equity matters for them now, they are dead. They are funding at hundreds of basis points higher each day.
this is not a bailout--it is a temporary liquidity facility so they can sell the company to whomever has the most exposure to them in an orderly fashion.
because BSC is not going bankrupt in a chap VII XI fashion. not with nearly a trillion dollars in counter-party risk existent.
"Is there anything ordinary folks can do?"
Not much, Huxley! The AVERAGE IQ in the US is only about 100, if you watch the polls and deal with the common folk on a daily basis, its not surprising! Damn few can find their own state on a map and as for the rest of the world? Fuggedaboutit!
And few have bothered to take even an intro class to Econ, so don't expect any great insights.
because BSC is not going bankrupt in a chap VII XI fashion. not with nearly a trillion dollars in counter-party risk existent.
correction: i meant to say "in a chap VII or XI fashion."
apologies for absent-mindedness.
"Is there anything ordinary folks can do?"
Sure. Save, don't borrow.
JJ Mollo and Luis A. del Valle,
I'm going to take you both to task.
First you J.J.
"When the dominos line up and somehow cause a disaster, everyone will say in retrospect how obvious it was what was going to happen. Why didn't we do something?"
It is obvious that it's going to happen. There are people who are warning, not in retrospect but before the fact. They have however been dismissed. People who think rationally on economics are not in the mainstream and are easily dismissed by the hoards.
Just go look up Bill Fleckenstein, or www.mises.org as they have be warning about the "Greenspan Put" for a long time whether actually calling it that or not.
I personally have been warning other people about this, friends, family, people on the web, for a long, long time. I used to post as "igtheist" on the atheism newsgroup to warn other atheists abou this kind of stuff and here is the responses I get: http://groups.google.com/group/alt.atheism/browse_thread/thread/40863e315deeb5ec/a6bd151d7059ec7b?lnk=st&q=igtheist+yang#a6bd151d7059ec7b
Yep, I knew back in 2003 exactly how this was going to unfold.
My ex-brother in law is an accountant and actually acted on my advice. He bought gold and mining stocks heavily back in 2002-3 and is now sitting pretty.
The Austrians, althought they are mistaken in some areas, have the best economic theories to date. They predicted this outcome.
You are warned. Massive consumer inflation is the next step in the works. The Fed is between a rock and a hard place and cannot control it. Get rid of your variable rate loan if you have one.
Luis A. del Valle,
You state:
"The right wing employs religion to incarnate its doomsday superstitions, while the left wing resorts to economics. I would suggest reading a few economics courses before you comment."
This is in fact incorrect. There are in fact more people on the right pointing out the insanity of what we are doing economically on "the right" than the left.
In fact, so much so, that those on the left accuse me of being a "right winger" whenever I point out the economics.
We have screwed the pooch economically and it is all due to Alan Greenspan and the presidents who listened to this garbage economics.
Alan Greenspan failed to understand the deflationary aspects of the Reagan/Thatcher revolution, how it would cause capital movement, and the related monetary issues. He then tried to pursue price stability in such an environment, not only for goods. Deflation was the proper market signal and it should have been allowed to occur. Instead he inflated the monetary supply and bailed out every foreign investment scheme that backfired, and subsidized the flow of capital overseas to boot.
The only people to notice this were in the vast minority, and were certainly not "on the left". They bitched an moaned during the Clinton miracle years, and bitched an moaned about Bush too.
So don't blame the left for any "doomsday superstitions". The most they've done is try to paint bad numbers as good during Democratic presidencies while painting them bad during Republican ones.
I'm the kind of guy you want to accuse and even then it doesn't stick. Why? Because I think capitalist systems are very robust. So there is a high likelihood that if we don't get some economic idiot like Nixon, Hoover, or FDR then the market will correct, with Americans at much lower living standards and foriegners with much higher ones. Not doomsday but not nice.
However, we are going to pay, and pay dearly for our economic foolishness.
Statements like: "since no one knows what many of its assets are worth" seem to pop up in every story about every real estate related business in trouble these days. I think that is the real problem. People KNOW in their gut what their assets are worth: NOTHING or darn close to it. Thats why there has been all of the behind the scenes shenanigans to make sure none of the Alice in Wonderland assets get marked to market. Then the Cheshire Cat would be out of the bag and the meltdown would accelerate exponentially instead of those in the know continually trying to find the next sucker to buy their crap (either a private fool or a public/government rescue).
To say the instruments held on Bear Stearn's (or any other Wall Street bank's) balance sheet are "worthless" is (1) to betray your lack of knowledge of financial markets and (2) to misunderstand the issues at hand here.
The challenge facing Bear and other banks is two-fold: (1) Many of the positions held by these banks (and hedge funds for that matter) are held on a levered basis. In other words, you're controlling $1 of assets with 10 cents of capital. Consequently, a decline of 10% in the value of the asset, if it were to occur, wipes out the equity backing the position. This is why write downs occur and why Citigroup, Credit Suisse et. al. have been taking in capital from outside sources. (2) Since there is no centralized price discovery mechanism and no daily settlement criteria, it's very hard to determine the true value of these instruments, so it's difficult to tell whether the instrument has declined by 10% in value or not.
That doesn't mean they're worthless, and in fact, if leverage wasn't used, you wouldn't be having this crisis (at least not to the extent that you're seeing it now). However, the opacity and complexity of these instruments, coupled with very high leverage used by some market participants, makes these markets very vulnerable to speculation and innuendo. And that is what has befallen Bear Stearns.
I think one thing some people are forgetting is that Bear Stearns has not been accused of fudging their books, hiding debts or engaging in other malfeasance. There is a reason why BSC decide to move up their earnings report to tomorrow because, in their minds, it will demonstrate that things aren't as bad as people are making them out to be.
I understand that most Americans don't know much about economics. It requires some math and no student in America is ever forced to take a course in which there is a single right answer.
But what about the managers at Bear? They are supposed to be smart people. Didn't they know how crazy it was to pursue the course of action that led to this? I'd be interested in a retrospective of the last five years to see any management changes -- people smart enought to say not on my watch.
Huxley,
"Is there anything ordinary folks can do?"
It's going to be very hard to avoid being screwed by this if you are an ordinary guy. Especially if you are already doing the right things, but are not especially rich.
I can only say if you are in debt then: 1) Get rid of debt that is variable rate. Especially if inflation will cause you not to be able to meet payments short term. 2) Housing prices will go down short term till inflation catches up long term. Despite beliefs to the contrary asset prices fluctuate at different magnitudes and with different delays during monetary inflation.
Thus commodities and assets furthest away from consumption fluctuate most in price and first during a interest rate base monietary inflation. While things closest to consumption fluctuate less and later.
Housing has inflated first because it is long term consumption, and that is the point the Fed is injecting the new money. It will fall as the bubble bursts.
Before that stocks were inflating due to new monetary injection in that sector (via bailouts amoung other things).
As rising commodity prices flow downward through the production process the consumer goods prices will rise last.
So you have to protect against this.
If you are barely making payments now then what will happen when food, clothing, etc. go up any more in price. You may not be able to afford to hold your house during the dip and might be forced to sell in a down market. It may be 5-15 years before housing prices catch up again. Lots of houses were built and they will put downward pressure on values.
So it's up to you to decide how safe your income is in a recession. If you think you are likely to lose your job for a protacted period and thus fall behind on payments you might want to downsize your lifestyle. Sell your house and move into a smaller one or rent. We are towards the end of the period that americans can use their houses as ATM machines.
I am betting I can earn enough to keep my payments going. If I bet wrong and my house is too big I'm going to lose big time.
This all depends on capricious government action at this point too. If the government decides to bail out stupid home borrowers the little guy might just make out the best by trying to hold on. The government may cap variable rate loans and you might just get an enourmous break, a windfall, but I wouldn't count on it.
Precious metals will skyrocket to unsustainable levels in this environment too. But it will be merely because people are trying to avoid being screwed by a sinking dollar. It's not a productive activity in and of itself. Thus it doesn't mean more goods production out of which to share. It's more of an everyone heading for the exit on the backs of others phenomenon.
I already knew about all this so I'm already heavy metals. That is, I'm closer to the exit then the average joe. For instance, I already put my IRA in silver bullion. Unfortunately, my 401K does not have this option, and it has the bulk of my liquid assets. I suggested to my company 5 years ago to add bullion and T.I.P.S. to the plan but they reject it. They keep rejecting it even though I have proven myself correct.
If you have long term cash savings you can buy TIPS. But be warned that the government may try to understate inflation (they already are) and thus not pay as much as they should. TIPS are Treasure Inflation Protected Securities.
Average Joes on fixed incomes are screwed. I suggest coming out of retirement and earning an income.
These are going to be hard times. There is no "right" and safe strategy, only a bunch of wrong strategies, and a bunch of very risky correct ones. I say risky and right because the government has collectivized our economic mistakes, therefore insuring that any response by the government has a profound effect on who gets stuck holding the bag. Who that is depends on political whim and that no one can predict.
I do know that the following people will get screwed the most: 1) People on fixed incomes. 2) People with variable rate loans. 3) People holding bonds collateralized by real estate. 4) 401k holders with no inflation protected options. 5) People holding cash long term. Short term might be a spurt of deflation. 6) People holding US stocks. 7) People holding foreign stocks that are dependend on US business. 8) People holding assets that are far away from consumption. 9) People in jobs that are distant from consumption. Construction workers, real estate brokers, etc. 10) Bond holders. 11) US workers 12) Stock holders. 13) Foreign currencies back with US cash and bonds.
Winners will be. 1) People holding gold and precious metals during the run for the exits who sell to the last people at the door. Risky to judge when this is. Was no-brainer 5 years ago. Harder to tell now. Are we there now or will gold go to $2000. One thing is for sure, it will not be going back to the price level of the eighties. 2) Foreign currencies. 3) If the foreign producers are able to shift to foreign consumers smoothly then: 3a) Foreign companies stocks and bonds. 3b) Foreign workers.
Thanks, Alan Greenspan.
None of this should be taken as personal financial advice. What you do personally is extremely dependent on factors I don't know, and am not qualified to assess. Furthermore, the dependency on government action makes prediction next to impossible.
I will tell you that despite what the financial guys tell you it is possible and likely that both bond and stocks will drop in this environment. Bonds normally go up on lower interest rates, while stocks up, and vice versa. We however are primed for stagflation.
Interest rates are based on three factors risk, time cost of money, and inflation. In this environment both risk and inflation will be rising, because the political pressure will be to inflate.
The government will be lowering the prime interest rate but foreign cash holders should finally understand at this point that the taxpayers can't pay. So they will want to dump cash and will fail to buy these bonds. The foreign buying of bonds, holding of cash, and offshoring of our capital, were all deflationary. When they stop and reverse the inflation will spike.
Savers will insist that you give them an inflation premium to lend. Bonds will drop in price because they are at a fixed rate. Who will buy a bond for $100 paying 4% when inflation is 8% or more.
Stocks will be pinched by the retraction in credit and the government will not be able to fix it. Loosening credit will only add to inflation, increasing interest rates.
Greenspan failed to understand those foreign deflationary effects of Reagan/Thatcher cause movement to free markets world wide. Capitalism is fair and the US was getting a larger share of the pie due to the fact that foreign countries were competing with one hand and one leg tied behind their backs. They have now untied the leg and loosened the arm.
You can lament, "Why oh why did my tax dollars go towards wising up those other countries? Why were we subsidising their children going to our colleges? Why were we bailing out bad investments in Mexico and elsewhere? Why do taxes go to subsidizing the movement of US capital overseas?"
The last winner is the US holder of capital who moved his investment overseas, was bailed out when he made a mistake, etc. Nafta, lowering of trade barriers, all that has an economic tendency to be better for the rich and screw the average guy.
True free trade increases overall production raising all boats on average. However the situation since after WWII was that the US was captial heavy and labor scarce, whereas the socialist countries were capital scarce and labor heavy. Opening free trade along with a movement to captialism on the part of other countries, is naturally going to screw US labor, favor US capital holders, favor foreigner labor and capital.
Of course people are not purely laborers or capital holders, but a mix. Older average guy laborers tend to be more capital rich and thus have done better. People who are in their 60s saw housing go up, stocks go up, etc. This was good for them because the owned these things. Young kids just joining the labor force are all labor and no capital. They are long term going to be harmed by the downward pressure on growth of salaries due to foreign workers.
Sorry for the rant. Just pissed I can't protect my 401K money and thought I'd spread the misery. Sometimes I wish I never learned this stuff.
"this is not a bailout--it is a temporary liquidity facility so they can sell the company"
This is true.
"Is there anything ordinary folks can do?"
Sure. Live within your means. Don't carry a balance on your credit cards. Don't buy more house than you can afford. Don't get a variable rate mortgage unless you're sure you'll be out of your place before the rate resets (hard to be sure of that). Don't buy stocks on margin. When you do buy stocks, avoid companies that are highly-leveraged and dependent on the credit markets.
rjsasko,
My house isn't worth, "nothing", but it is worth a lot less than the market says it is.
As the other guy says. The leverage is what makes not the underlying asset, but the leveraged one "worth nothing".
I will say one thing about the banks underlying assets. They are, for economic reasons, worth a lot less than they believe.
Thus when subprimes are bundled then sliced and diced many of the slices are worthless that are rated highly and held on the books as assets. The guys with the last crack at the pie isn't getting any slice when the pie shrinks.
The definition of a recession used to be two (2) quarters of negative growth reflected in GDP.
Last quarter Gross Domestic Product was +1.1%
There are people here acting as experts who don't even know what a recession is.
Shrinking GDP or a GDP number that was less that the previous quarter is NOT negative growth.
We are not even in a recession and people already have us prepared for soup lines.
<>
that definition was supplied by economists,not god...
Johnathan,
Wow, 1.1 percent growth, and how much has the dollar fallen in the same period?
Adjusted for dollars we are now #2 to Europe. Do you think they have a robust growing economy that just happened to surpass ours?
They don't teach real economics in our universities anyhow. You may think you know what's going on based on such simple reasoning as +1% isn't a recession but those in the know have broader concerns. The environment is qualitatively not quantitatively different.
Jonathan: There is a useful site shadowstats.org that deconstructs and exposes the statistical fraud perpetrated on us all for some decades. It also explains the governments's motives for the fraud.
"GDP" and "real GDP" are two very different numbers. By their reckoning, we entered recession in the spring of '07. Inflation is certainly understated, not overstated as Greenspan had been telling us. Ask any middle class householder.
Jonathan and all:
Correction, its shadowstats.com, not .org.
Most current info is subscription, but plenty of good archived info is free.
Why is this a surprise to anybody? The housing was a bubble, the dollar was/is dropping and gold has been rising since 2002.
B.Stearns was just bailed out by the taxpayer: they exchanged junk mortgage backed securities for Treasury Notes. For the first time ever, the Fed is now a creditor of a failed financial institution. Rumor has it that Wash. Mutual, Wells Fargo, and US bank are next.
Somebody above asked what to do? Get out of debt, diversify out of the dollar (Canadian, Euro, Swiss Franc), gold, platinum and silver. I know that isn't popular investment advice, but it has been my strategy since 2003.
Just be prepared: a weak dollar and high inflation are coming our way. Time to pay the piper... and the Chicomms.
Yes, I do not doubt that there are any number of web sites where you can find reconstituted GDP numbers.
Real GDP Unreal GDP Surreal GDP Vivid GDP Desirable GDP Media GDP Political GDP Democrat GDP Republican GDP
It is always good sport to play with numbers but if you cannot concede that the numbers we see and speak about are real, or trustworthy, then what is the point of having any discussion on a matter of economic reality when you believe that such a reality is open to interpretation? I guess for me, as an economist, there has to be a statistical baseline to work from that is not tortured to yield a preferencial result (be it good or bad, depending on the argument one wishes to make.)
And yes, 1.1% GDP is not a great number. I'm sure it pained the Bush administration to see it and realize that this is where the economy was in the last quarter - not good, BUT, it is still a positive number. There was actually growth overall.
And yes, the dollar is weak. Interest rates are extra-ordinarily low in the United States.
If interest rates continue to rise in Europe you can anticipate a further plunge in the dollar.
If US interest rates reverse upwards then you will see a swift dollar rise. It is that simple.
The Fed DID NOT bail out Bear Stearns. Bear Stearns has basically become worthless, its owners have lost nearly all of their money, and many of its employees will lose their jobs, starting with those at the top. You can't call that a bailout.
More accurately, the effect of the Fed's and JP Morgan's actions is to protect companies who did business with Bear Stearns. Even so, those companies are subject to being similarly wiped out, if they encounter solvency issues of their own. But at least they won't be wiped out by the insolvency of others. Such cascading bankruptcies are what crash economies and cause runaway deflation.
Meanwhile, notice where the massive layoffs are happening... Bear Stearns, Merrill Lynch, Lehman, Citi, etc. Not at Google, Apple, or even Ford & GM. This is as it should be. Wall Street caused the problem, and Wall Street is paying the price.
Clarification to my earlier comment: It's more accurate to say the the monetary system caused the problem (mostly Greenspan, but it was a worldwide phenomenon).
However, Wall Street profited the most from monetary inflation, and Wall Street is losing the most as the bubble bursts.
When you think about it, that's a pretty amazing accomplishment, and something that Bernanke deserves much more credit for than he's getting.
Slick has it right. I have yet to see much commentary on how regular folks are getting bargains on houses - whether sold by big builders like Hovnanian or Centex or sold by folks who still made a profit on a home they had been living in for 5 or 10 years.
It's a shame that some people borrowed more than they could afford to repay to buy a place ot live. The ones who were prudent and have not spent every nickel of equity plus a little will be able to refinance at very low fixed rates. The others will return to renting. They probably will be no worse off than than if they had never purchased a home.
The people who bought CDO's will for the most part be okay - the pensioners are in the tranches that get paid with the first 80%. The ones in the higher tranchers traded risk for a higher return and lost. They generally are folks who could afford to the take the bet. The institutions that misgauged the risk reward mix will be bought or liquidate their assets and the institutions that did not will be stronger.
The real danger is as FDR said fear itself that paralyzes the financial markets efforts to correct themselves by liquidating the bad debts and changing the ownership of the good debts. I think the Fed is doing an extraordinary job of preventing a cascade of panic selling.
I am not quite sure what the stock market worry is about - at any time line over a year it looks either steady or trending upward.
As several have said - live within your means, don't borrow more than you can pay back comfortably and only borrow for stuff that makes you money or will still be of use to you when you've paid off the loan. A Kia gets you to work the same as a BMW and if you want to own your home make sure you have enough equity to protect yourself if you need to sell in a down market.
"There is a reason why BSC decide to move up their earnings report to tomorrow because, in their minds, it will demonstrate that things aren't as bad as people are making them out to be."
lol. Good call. $2/share.
"Rumor has it that Wash. Mutual, Wells Fargo, and US bank are next."
Rumor? By all means, let's listen to rumours. There are so few of them. And they have such a high expectency. It's difficult at this moment to refrain from calling you a f'n idiot.
That's exactly the kind of comment I was talking about. If you knew anything about what is going on with these companies, you would never lump WM into the same group as WFC and USB.
There is a reason that Warren Buffett and Munger et al keep buying WFC and USB - but not WaMu. But I guess those dealing in rumours know more than these silly old men.
To all who took umbrage to my aphorism:
I find it interesting that I have never been called smug and arrogant by someone who was as knowledgeable and smart as I am, nor by someone who was smarter and more knowledgeable than I am.
I have also find it interesting that an ad hominem argument consists of replying to an argument by attacking or appealing to a characteristic of the person making the argument, rather than by addressing the substance of the argument or producing evidence against the claim. Many times, an opponent's use of an ad hominem attack is an indication that the opponent realizes that the argument itself is correct and cannot be refuted.
Nonetheless, in the bi-polar logic of our times, the vast use of ad hominem argumentation is due to the innumerable extremists that inhabit the internet. Given that extremists, be them Left or Right wing, need an excessively simple diagnosis, and a clear identifiable villain to be able to participate in any political discourse, ad hominem argumentation is a natural tool for them. Unfortunately, it is an unnatural tool of logic. This is why we have so little understanding in this World--let alone concensus--even though we are in the middle of a communications revolution.
With little understanding, you get superstition. With superstition you get doomsday scenarios. And this is why the right wing employs religion to incarnate its doomsday superstitions, while the left wing resorts to economics.
Oh I forgot to mention that given that the right wing employs religion to incarnate its doomsday superstitions, while the left wing resorts to economics, this is why the right wing extremist abhor evolution while the left wing hates free-trade. Both theories not only expose their superstitions for what they are: irrational caca de toro, but provide a clear path of progress to those they would subjugate with their ignorance.
Fascinating.
"what can the average guy do?"
It may be OK to pick a few specific individual stocks that you believe will do well ( I have some pharmaceutical favorites) and buck the trend but for now buying any stock index funds is not logical. They are gong down a lot more. The interest rate cut is not likely to do much tomorrow. As Greenspan has said, gold is well known as a long term protection against inflation and as a safe haven. Currently with REAL US inflation at nearly 10% it is foolish to TODAY have money in T-bills, US stock funds (some foreign funds, as well as currencies, are still doing relatively GREAT), bonds or CDs. Buy gold. The price of gold has more than tripled since 2000, Up 30% in 2007 and up more than 15% just this year alone. The nuts in DC have still not understood that we can not inflate our way out of the economic problems that are being caused BY the inflation of currencies world wide.
When Bernanke and the gang get serious about inflation like Reagan and Volcker did in the early eighties and RAISE interest rates 3 successive times, THEN it will be time to sell your gold. I would NOT hold my breath. They just do not get it. If you buy gold you will have some capital left to help rebuild America and the world when the dust settles on the remaining economic rubble.
DeniseL and all:
I quite agree, another rate cut can do little good and probably more harm. But if it lowers the cost of borrowed funds to lenders, it should over time serve to replenish their capital partially by improving their bottom line profitability and increase the retained earnings line. Witholding dividend payouts to shareholders will also help in this regard.
So far, the BSC rescue does not involve the taxpayer, only the FED. This may change.
Egan-Jones Ratings said Bear needs a few $ billion in equity within the next few days to stay afloat.
Remember, too, that billionaire investor/currency trader Joe Louis bought 7% of Bear a few months ago at ~$100 per share. Now it's at $30. Just a caution for those tempted to do some bottom-fishing.
Posted by Fred | March 15, 2008 1:36 PM