Honey I Broke The Economy

This Bear Stearns sale, for less than the COST OF THEIR OFFICE SPACE in Manhattan, is really ominous. This is Great Depression kind of stuff: a run on the bank, government intervention to prevent disaster, and a chief executive who is unconcerned of the consequences. Here's Bonddad.

-- For all practical purposes, Bear Stearns is bankrupt. Despite the shotgun nature of the Bear/JP Morgan deal, Bear would not have agreed to a $2/share valuation unless there the damage to their business was extremely severe.

-- JPM swooped in quickly on this deal. My guess is they have been watching this situation for some time and waited for the right moment to get this deal. All the players lined up too quickly in JPM's favor for this to be a happy coincidence. JPM sees a play here and went for it. This actually is good news. If there are other firms in financial straights right now, others know about it. The Fed has demonstrated they will help to finance the deal. In short, if another firm goes bankrupt it will be a quick procedure to deal with it.

-- The Federal Reserve is scared shitless. There is no reason for them to get involved in this deal unless they were worried about one of two things (and probably both): 1.) the ripple effect and/or 2.) other banks in a similar situation. The Fed is looking for any tool (and making some new ones up) to prevent a system wide crisis.

The Fed is also lowering its discount rate and setting itself up as a "lender of last resort" for government securities. There's great coverage on this all over the econosphere; Calculated Risk and others. Matt Stoller had the best summation of this entire mess.

For some time going forward, there's going to be lots of econo-speak about bail-outs and Federal Reserve tools to manage insolvent banks, but remember one basic fact. You can't run a political system and an economy based on loan-sharking, intimidation, and socialism for the rich and powerful. Now, that might sound like a screed, but it's not. I'm not just saying that the rich stealing from the public is a bad thing, I'm saying that it no longer works because there isn't enough left to steal such that the theft can be hidden. Our policy apparatus is falling apart when it has to resort to bribery and threats.

They've privatized wealth and socialized risk for too long, and relying on consumers to bail them out isn't going to work anymore. We're no longer the world's largest economy and as we contract and depress we risk becoming totally irrelevant. We're at the point where our economic leaders are openly talking about "restoring faith" in the economy, because faith, not fundamentals, is all we have left.

Hoard your money. We're in for a panic.