Sub Prime Time

That time when the economy flocks and flies south

© Bryan Zepp Jamieson
http://www.mytown.ca/zepp
03/15/08

Remember that huge rally the market had Wednesday, after the Fed agreed to another massive bailout? The Fed underwrote nearly a quarter trillion in subprime mortgage bonds – you remember those little fellows, the bad debts repackaged as assets. The same ones that caused the crisis to spread in the first place, that’s right.

OK, we’re subsidizing them to the tune of a quarter trillion. That’s in addition to the nearly half a trillion we’ve dumped in so far to try and stabilize the situation (ie, replace the money the brokers stole before the owners notice it’s gone and dozens of bank runs ensue).

The market swooned with relief and shot up 400 points. Then it just sort of stalled out, waiting for the next hammer blow to strike.

That came early Friday, when Bear Sterns announced they were basically broke. One of the biggest investment banking firms in the business.

So the Fed underwrote them, to the tune of another $200 billion. By now, we’re starting to look at a pretty sizeable chunk of the economy, and even the dumb bastards who think if they are nice to millionaires then millionaires will be nice to them are beginning to wonder just where all that money is coming from, what it’s doing, and where it’s going.

This time, the market wasn’t fooled, and plunged. Of course, there were a few other factors, mostly dealing with the fact that the dollar is falling faster than Michael Jackson’s career. Gold picked the same day to break $1,000 an ounce, oil hit $110 a barrel, and the Swiss Franc, once worth 40 cents on the dollar, hit parity. The Australian dollar isn’t far behind. Oh, and retail sales took a big hit.

There has been a sea change in the Fed’s attitude, if not its actions. Before, it was simply trying to give foundering banks liquidity so that they could still extend credit. Never mind that it was their overwillingness to extend credit that got us into this mess in the first place.

Now the Fed is taking a domino theory stance. If one big banking institution crashes and burns, they’ll all crash and burn. While this may strike you as an immensely satisfying thought at this juncture, the fact is something like that would throw us into a really major depression. Like the one that made 1932 such a wonderful year, yes.

The trouble with the domino theory is that, translated from the Vietnamese, it means, “throwing good money after bad.” All this money doesn’t guarantee that these institutions, corrupt and manipulative and essentially rotten, won’t collapse anyway, leaving us with an immensely devalued dollar, of which none are in our own pockets any more.

In the case of Bear Stearns, the bailout, as always, is called a loan. The Fed loaned the money to JP Morgan Chase, who in turned loaned it to Bear Stearns, effectively buying them out In making the loan to JP Morgan, they were allowed to use as collateral . . . wait for it . . . shares they had in Bear Stearns stock!

This is a bit like wrecking the car, and going to the bank for a loan to buy a new car, and offering the old, dead car as collateral. Only in this case, you have another bank apply for the loan in order to establish a sense of creditworthiness.

That’s one of the reasons why I don’t think the Fed’s actions this week are going to prevent a crash and depression. They’re still fucking around, playing games, and robbing us blind.

Remember all the interest rate hikes that caused the dollar to devalue and were supposed to spur economic activity? Have you noticed your bank or credit card company reducing the rates they charge? Of course not. They just pocketed the difference and went right on gouging you. That’s why the wave of foreclosures just keeps getting worse and worse. Even when they have good reason to stop cheating their lendees, the lenders just can’t bring themselves to stop gouging.

Unfortunately, that impacts the element that triggered all this: the housing market collapse. When the bubble burst, that was when there should have been a moratorium on subprime foreclosures. Right wingers like to blame the semi-recession that occurred in the first few months of the Putsch junta on the collapse of the tech sector. The housing sector is ten times bigger than the tech sector at its peak. Millions of people have lost their homes, millions more will lose their homes. A lot of people are simply walking away from deals where they were able to buy a home in southern California for half a million at an affordable “introductory” rate of about 4% with no payments on the principal, and who now suddenly find their payments have doubled and tripled to beyond what they can afford, and that they now owe half a million plus double that in interest on a house that now has a market value of $350,000. Banks end up taking possession of houses they don’t want and can’t sell, and sit empty and deteriorating, good only for listing as ever-more fictional assets on the bank’s ledger sheet. Millions of people, trillions of dollars.

This is pushing huge amounts of poison into an economy that is already sickened by the foolish export of most of the productive sector to countries where they can take advantage of slave labor and the lack of environmental or safety standards. It is an economy that rests on consumption, and the providers have jacked their prices and cheated the consumers on their pay and are now stunned to discover that the consumers aren’t buying their stuff.

And now we have a big surge of inflation coming, well above the 14% we are presently at.

And government is broken because for the past 28 years, it has been run mostly by ideological lunatics who thought that letting the private sector regulate itself (you know, like setting the terms for home loans...) would somehow benefit all of us. To this end, they WANTED government broken so it wouldn’t interfere with the noble cause of bankers helping poor people get homes.

In the meantime, the Fed will lower interest rates some more, further eroding the dollar, and continue to bail out banks that stole themselves hollow so the thieves will get away rich and happy, loans extending into the trillions, covered with increasingly worthless money that the Fed can print on an as-needed basis.

But don’t worry. George W. Bush is our president.

He’ll save us. He’s already promised us the economy is sound and the fundamentals are good.

Happy days are here again.