Bear Stearns, Bernanke and the Economy

Dear All, it’s been a while since my last input but I did forecast this meltdown didn’t I as we bounce around from one crisis to the next. This crisis since August 2007 still has some way to go already some experts predict we are at the bottom of crisis but I say no way we still have a way to go investors are spooked and fortunes lost. Banks simply are not lending to each other fear of the unknown is the main factor right now plus the Federal Reserve stoking inflation flooding the market with liquidity is one thing but what the Fed is not providing is capital and boy do some of these banks need capital as the Sovereign Wealth Funds sit back and survey the inflation problem the Federal Reserve is creating. Yes the markets love the rate cut and rallied but this is a false dawn. Last week we heard Bear Stearns was in trouble and the Fed injected $200bn of liquidity the markets responded well and we were told all is well at Bear Stearns, well the rest is history, today the market again rallied but this is short term all the Federal Reserve has done is stick a band aid on a huge wound which won’t stop bleeding it’s simple folks it’s all short term what about the long term who is going to take all these assets bought by the Fed? Simple the tax payer but this is only part of the story the total the Fed can hold on it’s balance sheet is $800bn, it has already pumped into the system $400bn so what about the next crisis? The Fed has limits and can only do so much right now inflation is not its major concern but they are storing up problems for the long term.

Has JP Morgan Chase stolen Bear Stearns? Did the Federal Reserve force Bear Stearns to accept JPMorgan’s all share offer of $2 per share at a rock bottom price. Whatever the reason JP Morgan Chase have them selves the bargain of the century. The deal will cost JP Morgan in total around $6bn this is made up of severance pay and retention to waves of litigation and asset writedowns. But my concern is that Bear Stearns wanted a $30bn loan from the Federal Reserve over 9 months but as the Fed were in control of the situation they forced the merger of Bear Stearns with JP Morgan this has opened up investigations by the SEC that some funds shorted Bear Stearns and circulated the rumour of liquidity problems, Bears could not sustain the run on the bank over 3 days and went hand in cap to the Fed.

Things were already bad at Bear Stearns they were heavily exposed to the troubled US mortgage market and unlike many of its peers; it had no deposit business to offset its losses. The bank also was a heavy lender to hedge funds, some of which have collapsed in recent weeks after losing money on mortgage-related investments. Senior managers made mistakes and should have sought capital injections earlier but whilst dealing with the Chinese for capital inflows talks took longer than expected.

So what now for the US economy do we have another bank on the verge of collapse?

My concern now turns to the currency markets with the dollar at all time lows against major currencies and these sovereign wealth funds sitting on huge dollar reserves it is only a matter of time before they start dumping the dollar stating enough is enough as they themselves import inflationary pressures. Bush’s fiscal tax stimulus won’t take affect till the summer and even then consumers will probably pay down on debt and not spend as expected, Bernanke risks higher inflation and a weakened dollar however at the back of his mind must be zero interest rates will America follow the path taken by Japan and enter an era of deflation?