The Data Points Are Coming In Too Fast, But...

...these are my impressions so far:

When the Fed took its extraordinary action to rescue Bear Stearns (and I want to assure younger viewers that it was, at one time considered extraordinary for the Federal Reserve to recue financial institutions), "free-market" commentators like Jim Rogers were saying that it was "not the end of the world" if an investment bank like Bear Stearns went bust.

Meanwhile, in the real world, the people who were involved in the Bear negotiations were dealing with the fact that if Bear was not rescued, Lehman Brothers would be next - within a week - and Merrill would be next. So although these people (and I know some of them) believe the same way Jim Rogers does, they did the extraordinary thing - against their beliefs - and rescued Bear Stearns.

But the problem has been that every extraordinary move by the Fed and Treasury have been too little, too late. Their actions SEEM to be "all they can do" and "more than we would have expected". The actions are more than we would have expected, but only because these people are laissez-faire radicals. Clearly, each individual action has not been "all they can do" because they have then gone on to do even more - each time.

This is absolutely the worst possible thing to do - possibly even worse than doing nothing at all. If they had done nothing, then the election in November would be little more than a formality. It wouldn't be a question of whether the Republicans would lose, so much as whether there would even be a Republican party going forwards (even now, here in Washington state, the Republicans have taken to calling themselves the "GOP Party," avoiding the world "Republican" as much as possible). There would have been a panic, and disaster, but at least it would have happened so suddenly and early enough that the whole government would have been forced to act.

Instead, the laissez-faire radicals have compromised their "standards" just enough to put a patch on things for a few months at a time. Their credibility in the markets is starting to fall and they are beginning to inject not moral hazard but dangerous complacency into the financial system. The Administration was only able to rescue one out of the four this time as big buyers could not be induced to save the system (and themselves, ultimately, but they don't see that). Merrill is now part of Bank of America, but Lehman is bankrupt, AIG needs to raise an incredible $40 billion in order to stave off disaster, and we are not even hearing about Washington Mutual.

For the Federal Reserve bank to lend an insurance company this badly run $40 billion would be insane. They need to take the assets into conservatorship. The Fed is already becoming reckless, now apparently accepting any crap security out there for "collateral" on the loans it is extending to keep these firms afloat. Even the deal that "saved" Merrill Lynch is deceptive in that it was simply a matter of Bank of America giving Merrill Lynch shareholders stock and then receiving exceptional new credit facilities from the Fed. The underlying assets are no better than they were Friday. Bank of America has simply weakened its capital position.

As for WaMu, I think that they are just talking to their regulator and the FDIC - and probably stalling. These idiots think they can ride this all out. And more fundamentally, they don't care. Why should they? They're rich. It's not going to hurt them. It's just a game.

Meanwhile, gallingly, other stock markets will crash worse than the ones in the U.S., because even though this crisis is happening at the very heart of the American financial empire, it is the extremities who will feel the lack of blood first.

May you live in interesting times