Fannies and Freddies and Bears, Oh My
Back in March, I wrote most of a piece on the near-collapse and subsequent fire sale of investment bank Bear Stearns. However, the simultaneous near-collapse of my ability to form coherent sentences caused investors to lose confidence in the piece, and I was forced to to sell my language-comprehension skills to J.P. Morgan Chase for pennies on the dollar.
Financial observers and English teachers at the time noted that my failed post was simply a consequence of the blog market adjusting itself, and that no regulatory oversight by grammar or syntax was needed.
However, a recent groundswell of demand for that failed post has led to several more near-collapses on Wall Street, thus making my piece relevant again. All I can say is -- thank you. I'm humbled. Your $700 billion check will be arriving shortly.
Ah, for the heady days of March 2008 and the winsome innocence of $30-billion bailouts. Come with me and bask in the notalgia...
All the recent discussion about poor people, high mortgage interest rates, and how they turned out to be a foundation of clay for our magnificent financial edifices has masked the discussion of a much larger issue than the market in subprime mortgages. Namely, the market in credit default swaps.
No one seems to know exactly what credit default swaps are or what their real value is, only that you can make money by selling them to people. Something like $45 trillion (yes, trillion) in credit-default-swap business has been transacted. That's three times the annual US GDP.
So what are credit default swaps? They are explained as being something like insurance against institutions defaulting or otherwise not paying their debts. Until its near-default, Bear Stearns was a major player in this market.
A near-default that was avoided by a $30 billion dollar loan from the Fed.
So. Pop quiz. In order to save the market in institution-default insurance, when one of those market institutions threatens to default, you need:
a) $45 trillion in institution-default insurance, or
b) $30 billion in taxpayer monies.
Apparently, the choice is clear.
Given the Fed's stellar performance in their first test of economic-fiasco avoidance, they might be looking for new Everests to climb. Here is one suggestion: bail out the US Mint.
Since the decline of the dollar, the cost of manufacturing Benjamins has risen by nearly three thousand percent. To print a single dollar bill now costs $100.05. Clearly action is needed.
If the Fed bails out the Mint, the Mint can provide a sizeable long-term return by only printing money that already exists. Aside from the obvious benefit of slashing waste, this has the added bonus of getting the Mint in on the ground floor of the Green Economy. It will simply recycle those dollars back to the Federal Reserve, where they will be stored safe for reborrowing by the Mint. The real winner will be the U.S. taxpayer.
However, some critics say this will only work until the world runs out of Scotch Tape to hold the aging bills together. At which point the Fed may be forced to declare that each shred of a $100 bill is worth $10. This seems appealing at first glance, but it is simply manufacturing money out of nothing. In the best case, the government will be forced to nationalize the manufacture of Scotch Tape, absorbing the cost by borrowing against future money-recycling revenues.
In the end, the best option might be to offshore the printing of US money to more business-friendly countries. This would give us the best return for the lowest cost. Now, protection of the US Mint from overseas competition might appear desirable, but in the long run it reduces our competitiveness and weakens the economy. In these troubled times, it's critical for everyone to support free trade.