The propaganda machine of the Monetary-Financial Complex that runs along the New York-Washington, D.C. axis is running at high r.p.m. propagating the myth that the government-backed J.P. Morgan/Chase sweetheart buyout of Bear Stearns was not a bailout. After all, didn’t Bear stockholders lose virtually everything, and didn’t Bear employees, who own 30 percent of the stock, not only lose their investments but probably also their jobs? Doesn’t this all go to prove that those who engage in risky financial behavior must pay the consequences, no matter who they are?
Well, yes and no. Some people paid (Bear stockholders and employees) so that others could be bailed out (investors in Bear’s $30 billion worth of mortgage-backed securities) and still others could make a killing (J.P. Morgan/Chase). So maybe “bailout” isn’t really the right word. How about “pillage and plunder”? Some must perish so others may flourish.
Don’t fall for the Establishment’s “watch-the-birdie” gambit. Bear is the birdie, and that birdie is meant to divert the public’s attention from the long arm of the Wall Street-D.C. Monetary-Financial Complex slipping its hand into the Fed’s pocket to the tune of at least $30 billion. The House of Morgan got to cherry pick Bear’s performing assets for pennies on the dollar while it off loaded Bear’s degraded assets and growing liabilities onto the Federal Reserve System. This all has the creepy feeling of a mafia story where one made man never sees the bullet coming from his mob buddy while the crooked cop is the cleaner seeing to it that the mess gets quietly swept under the rug.
Don’t forget, someone invested in that $30 billion pile of risky “structured securities” that J.P. Morgan/Chase refused to take onto its books unprotected, which the Fed agreed to guarantee. If that’s not a “bailout,” I don’t know what is. Those someones expect to continue receiving their quarterly envelopes containing payments on their investment in the securities, which had required increasing subsidization from Bear’s other revenue centers as the performance of the underlying mortgages meant to finance the payments to investors in the securities deteriorated. Indeed, the securities had become so devalued Bear couldn’t even sell some of them to raise cash to cover the obligations created by the rest of them.
To paraphrase Faye Dunaway in Chinatown, “It was a liquidity problem, a solvency problem, a liquidity problem caused by a solvency problem,” and Bear’s problem was a lot like Faye’s: coping with the consequences of being stuck in the middle of an incestuous daisy chain of counterparties inside the Monetary-Financial Complex. Bear was the unfortunate fall guy who took the bullet for everyone else — but it’s only Wall Street. The question now is will the Complex go to the mattresses in an all-out civil war?
HAD THE GOVERNMENT stayed out of it, the market would have liquidated Bear on its own. Assets would have been sold off at something close to real market value, and everyone involved (not only Bear-Stearns stockholders and employees but also investors in the $30 billion pile of collateralized securities) would have taken their losses.
But the Monetary-Financial Complex couldn’t abide allowing the market to work. So, it created the specter of a financial meltdown, a doomsday scenario complete with superhero bureaucrats and bankers racing to the rescue. All the doomsday rhetoric, however, sounds suspiciously like the over-heated, imminent-danger rhetoric we heard after the sickening spectacle of the Twin Towers collapsing. It is a classic fear monger designed to expand the scope and reach of government in the aftermath of a crisis that the Monetary-Financial Complex itself created in the first place. In this case, it wasn’t a preemptive attack on another country that was called for in response; it was a preemptive hit on another financial wise guy. Everyone is expendable to protect the family.
The big lie in this case isn’t that Saddam has weapons of mass destruction that he is just hankering to drop on America; it is that weapons of financial destruction (derivatives of various mega-tonnage) are set to detonate and bring down America’s financial structure unless some bad guy takes a bullet. The Bear got caught in the cross hairs.
The average person has been conditioned to accept the bank-run analogy, i.e., a mere liquidity problem requiring the central bank to act as a lender of last resort to stem the stampede of a bank run. The real problem, however, isn’t a classic liquidity problem where fundamentally sound institutions are experiencing a run against ill-liquid but financially solid assets; it’s a solvency problem that was created when prices got way out of whack. (Does anyone really believe these mortgage-backed securities are fundamentally sound assets that will rebound in price anytime soon?) Or to paraphrase Monty Python, this parrot isn’t experiencing temporary breathing problems brought on by a bad-ozone day, “This parrot is dead.”
Never, never, never take your eye off the source of the problem. Boiled down to its essence, the problem is this: Prices were allowed to get way out of whack. (We can argue about how and why but there is no doubt about the fact.) The only solution to solve the problem, the only way to get the economy back on track is to allow prices to fall to market-clearing levels. And, if you believe in government-engineered “soft landings,” I’ve got a bridge to sell you that I just bought from Alan Greenspan yesterday.
Remember, the only reason the Great Depression spiraled out of control and went on for so long is that prices (including the price of labor) were not allowed to fall to market clearing levels.
The other thing to keep asking yourself while experiencing the financial terrors implanted in your brain by the Monetary-Financial Complex is no matter how scared you may be, do you really want to put your faith in politicians, bureaucrats and hungry bankers to solve the problem they created? Beware of predacious do-gooders on the hunt.