It pains me to hear the Congressional testimony. Ben Bernanke is claiming that the mortgage bonds the Fed bought should be worth more in the future than he paid. Yet, he did not know their current market value and could not provide information. My favorite argument was that Bear never ran out of capital. It ran out of liquidity. So are bankers that dumb? Would they not lend to a bank that had plenty of capital? And if so, then why would JPMorgan not buy them without the Fed's help? There are so many contradictions and specious justifications. Unfortunately, few in Congress are good enough to ask the right questions.
"The Fed did not have a lot of time to react to this situation as it unfolded--a matter of a hours, not days."
Excuse me? How about 30 years? The Fed has helped create more and more leverage in the financial system for 30 years. Most broker/dealers have around 33 times leverage, meaning only a 3% fall in asset values will bring down the firm.
Did the Fed, with all their knowledge, experience, and resources:
1) Never imagine a broker/dealer would fail? 2) Did not know how to backstop the financial system should a broker/dealer fail without excessively rewarding the failing firm and its buyer, while costing the U.S. taxpayer billions of dollars?
Please! It is utter incompetence.
JPMorgan and the Fed signed a deal with Bear that did not make their backing conditional if the deal were to fall apart. This allowed Bear to negotiate a price that was 5 times what was originally proposed!
The Fed apologists always cry "systemic failure, systemic failure," but they are leaving out the fact that it is the Fed that (a) encouraged systemic failure through its policies; (b) does not have a competent plan in place to deal with systemic failure as it occurs. I'm not saying nothing should be done. I'm saying what should be done should be done competently!
Fake Ben Bernanke
FakeBen.com
FakeBen is a blog to monitor the Fed and its actions and encourage community participation. At FakeBen, we believe that the Fed policy of the last two decades has created a credit bubble as large as that created in the 1920s. This bubble will lead to either inflation, a recession, or both.
