no third solution

Blogging about liberty, anarchy, economics and politics

Fed Reaches for Hammer, Again

March 19th, 2008

I’m a few days late on this, so please nobody accuse me of piling on. This will probably be my only post specifically related to Bear Stearns, because really I just don’t give a shit about the specifics anymore. Everything the Fed does, all government policy, is backwards, hamfisted, and counterproductive. So is the JPMC bailout of Bear. I’m not surprised.

Wasn’t it just last week, that the Fed “injected” something like $200B into the financial markets to promote liquidity? Something must’ve gone horribly awry, because the price of gas is going through the roof, and then this Bear Stearns fiasco happened, where with Uncle Sam’s encouragement, JPMC is able to buy the Fund at something like a 90% discount and get a federal guarantee on the toxic investments that they inherited for free! It must be really nice to earn risk-free profits, underwritten by the population at large.

Along with taking on the risks associated with Bear’s assets, the Fed

will now make it possible for investment banks to borrow money as long as they put up collateral. The Fed in effect is offering to be a lender of last resort for 20 major Wall Street firms, a role it has previously played only for commercial banks.

[These] “primary dealers” [will have], access to cash in exchange for assets in which the market is not currently functioning.

Nothing chaps my ass like someone telling me the “market isn’t functioning,” because what’s ordinarily happening is that there is no market, or what’s left of one is so hamstrung by regulation, interference, and distorted price signals, that functioning properly is rendered almost impossible. But these people are talking about the market for securities that nobody in their right fucking mind wants to buy, and lamenting the fact that nobody is buying them. Because there’s a qualitative difference between a market which isn’t functioning, and a market which clears goods and services at prices you deem unsatisfactory. Markets clear!

We’re bailing out the big boys, injecting liquidity, and watching smaller players (e.g., Countrywide, New Century, and now Bear Stearns) go under left and right, isn’t there a pretty serious problem here? A decade of loose monetary policy has just put us between a rock and another very hard place, and the only policy response is “more loose monetary policy.”

It just goes to show that when the only tool you have at your disposal is a hammer, sooner or later, everything starts to look like a nail.

Sometimes, though, you just need to start tearing things down.

no third solution

Blogging about liberty, anarchy, economics and politics