MARKET TRUTH & TURMOIL

Many experts say we are in the midst of the biggest housing bubble ever and are worried that the ensuing banking and credit crisis could spread like a virus.

Veteran economist Allen Sinai of Decision Economics Inc. in New York says, "We will lose, in some form, several major financial institutions before this is over."

Some estimate that by the time the delinquency wave has crested, and lenders write down loans to levels that borrowers can afford, losses on mortgage bonds across the economy might total $1 trillion.

Though many Wall Street observers believe that the Fed's use of its own capital to shore up Bear Stearns is just the first step toward an eventual government bailout of the housing market, there is a problem with that thinking.

While the Fed pumped $400 billion into the system -- including $30 billion to assist JP Morgan in it's buyout of Bear Stearns this week, using only mortgage-backed bonds as collateral -- the unfortunate truth is that this was almost half the central bank's available funds. That leaves little room to bail out other financial giants.

And instead of following its usual practice of buying only safe U.S. government debt, the Fed is accepting mortgage-backed securities as collateral for loans. Economist Paul Krugman said that, to his knowledge, no advanced-country's central bank has ever exposed itself to this much market risk.

The current situation, "Looks increasingly like one of history's great financial crises," says Krugman.

And then there's the matter of the Fed using taxpayer money to backstop a private institution that had acted in an entirely reckless manner. By not forcing financial institutions to face the consequences of their decisions, the Fed may simply encourage other financial institutions to be more reckless in the future. Many believe that both lenders and borrowers should be forced to face the full consequences of their decisions.

Perhaps this will provide perspective on the size and scope of the current turmoil; Bear Stearns was established in 1923 and withstood not only the Great Stock Market Crash of 1929, but also the decade-long Great Depression that followed. Though it managed to sustain itself through those crippling events, it simply crumbled during the current crisis.

That's a very bad sign.

- Sean M. Kennedy

Sean is an L.A-based freelance writer who has written on a wide variety of news and current events topics, from politics and social issues, to health and wellness, to money, business, sports and music.

His work has been featured in various magazines and newspapers, including Baseball Digest and the Portsmouth Herald.

Comments: 5

Maureen Sullivan Stemberg Mar 18, 2008, 7:37pm EDT

Sean, great reporting...I heard on Cnn by one of the leading Economists, this is very similar to the depression. Then he added...I don't want to worry anyone.

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Larry M. Mar 18, 2008, 8:04pm EDT

It's the nature of our money. These economic disruptions have been happening for thousands of years. The fact that our money hasn't basicly changed since money was first developed before recorded history began should give you the idea that maybe it really isn't suited to an industrial ecomony. Perhaps the needless poverty, the unemployment, the organized crime, the fact that something like 25% of our production exists just to service money should give you the idea that a medium of exchange and standard unit of account shouldn't require all this bagage.

To see that there is a better way that we can turn to when the pain of this money we use gets too great read "Invisible Hand" which I have published here on Gather at:

http://www.gather.com/viewArticle.jsp?articleId=281474977234427&nav=Namespace

It is a unique idea you will find nowhere else. It is so different in its point of view that you might have trouble grasping how it works because of the mental habits of a lifetime in dealing with our current kind of money. But if you relax, enjoy the novel's story, you will find that it all makes sense and is explained in considerable detail.

Give it a shot. For once you can read a novel and ask the author questions or tell him what you think of his ideas. :-)

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Michael Covel Mar 21, 2008, 7:00pm EDT

The Fed was intent on saving the stock market after 9/11. So they cut rates to basically zero. What followed? A real estate bubble. Then we get to 2005 and they figure they have a problem and raise rates 17 times. They popped the bubble summer of 07. But wait! Now we have to go back in and lower rates again back to close to zero to save real estate and stocks...again. Maybe it works. However, the severe penalty is inflation and a worthless dollar.

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Rony J. Mar 29, 2008, 9:32pm EDT

great article

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MARKET TRUTH & TURMOIL

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