19 August 2008

ECONOMY : Trickle Down from the Bailouts

'The federal government is drowning in a sea of red ink'
By Roger Baker / The Rag Blog / August 19, 2008

Bernanke and his crew at the fed bailed out Bear Stearns at taxpayer expense because they feared not doing so would have caused a financial meltdown. There are many tens of trillions in financial derivatives that could quickly cause a panic and domino effect if they don't keep throwing money at the banks to back up these tangles of derivatives which guarantee bonds and that the US financial system is sound.

The banks they need to bail out to prevent a spreading panic keep getting smaller and smaller. Bailing out Fannie and Freddie is only a matter of time now. The federal government is drowning in a sea of red ink.

But meanwhile all that bailout money is leaking into the broader economy and driving up "core inflation", which in turn underestimates true inflation. When that happens, you lose money by holding bank deposits and treasury bonds and you have to raise interest rates, which then makes the derivative credibility problem worse. Things are unstable and could deteriorate pretty fast if the Chinese and Arabs and everyone start cashing in and dumping their dollars internationally. Get ready for more inflation, as Fisher of the fed is warning of now:

Fed's Fisher Says U.S. May Face `Lingering Inflationary Fever' / Bloomberg / August 19, 2008

Note from this last link that everything hinges on energy prices driving cost-push inflation moderating. If peak oil is real (which it is) then there is no way out; no amount of bailouts can paper over the reality all the trillions in derivatives that guarantee that the big corporations can repay their debts are as worthless as all the subprime loans that were involved in the first stage of the widening crisis.

See the following stories:

Bernanke Tries to Define What Institutions Fed Could Let Fail / Bloomberg / August 18, 2008

Large U.S. Banks May Fail Amid Recession, Rogoff Says / Bloomberg / August 19, 2008

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