As this article by Michael Hudson (formerWall Street economist and current professor) makes clear, in the US
more than $1 trillion in official money has been applied to the
The bailout started on Sunday, March 16. The government and JPMorgan
Chase had reason to be embarrassed about the negotiations, for the
details trickled out on the Federal Reserve or Treasury websites and
Mr. Paulson’s speeches went far beyond just Chase and Bear Stearns. It
turned out that on the same Sunday on which he had negotiated the $30
billion Fed bailout, Mr. Paulson started a frenetic ten days
orchestrating actions by the Treasury, Federal Reserve, and other
government agencies to earmark a trillion dollars to re-inflate
financial markets for mortgage holders and their associated creditors
The American public may justifiably be puzzled by how the government
can seem to come up trillions of dollars for foreign wars and banker
bailouts, but so little for them. The United States is spending an
estimated $3 trillion for an illegal war that has made us less safe,
and $1 trillion so far to rescue bankers in a way that is destabilizing
And the European Union has been no slouch as
they have applied roughly the same amount. It is true that these
efforts have been made in the form of loans and cheaper credit, but it
is still a very large amount of liquidity and overt stimulus.
And on both sides of the pond, the central banks are exchanging good money for highly questionable (read: unmarketable) debts:
The Federal Reserve has the "lend freely" thing
down pat. As for the rate on the loan and the quality of the
collateral, that’s a different matter.
Last week we learned that banks were taking advantage of the Fed’s
largesse—extending credit to non-banks via its Primary Dealer Credit
Facility, or discount window by any other name—by bundling high-yield
corporate loans into securities that would qualify as collateral at the
The Fed isn’t alone in broadening the range of collateral it is
willing to accept in response to the credit crisis. In December the
Bank of England added asset-backed securities to its eligibility list.
The European Central Bank, which has extended the term of its loans in
recent months, has always accepted a range of marketable and
non-marketable assets as collateral.
The European press is abuzz with stories about Spanish banks
tendering boatloads of asset-backed securities as collateral for ECB
As property bubbles implode in some of the smaller Eurozone
countries, credit availability has dried up, sending commercial banks
to the ECB even though "there is no formal lender of last resort in the
European Monetary Union," said Bernard Connolly, chief strategist at
Banque AIG in London. "The need to rescue banks in particular countries
would create political problems for EMU: Which country’s taxpayers are
going to bail out another country’s lenders?"
So the Fed is in good company in the race to the bottom on collateral quality.
What happens when you apply that much money? Why, inflation and falling currencies, of course.
So what, then, is the official response of the bankers to the predictable, but alarming, consequences of their actions?
Why, that would be a simple matter of browbeating an uncooperative market, rather than admitting their policies are at fault.
Authorities lose patience with collapsing dollar
Jean-Claude Juncker, the EU’s ‘Mr Euro’, has given
the clearest warning to date that the world authorities may take action
to halt the collapse of the dollar and undercut commodity speculation
by hedge funds.
Momentum traders have blithely ignored last week’s accord by the G7
powers, which described "sharp fluctuations in major currencies" as a
threat to economic and financial stability. The euro has surged to
fresh records this week, touching $1.5982 against the dollar and
£0.8098 against sterling yesterday.
"I don’t have the impression that financial markets and other
actors have correctly and entirely understood the message of the G7
meeting," he said.
And there are some out there, notably bankers
who got us into this mess and never saw it coming, who are saying that
all is well and that the worst is behind us.
Whew! That was easy!
April 16 (Bloomberg) — Jamie Dimon, Richard Fuld,
Lloyd Blankfein, and John Mack say that the credit-market contraction
is winding down. Investors whose bank stocks plummeted aren’t
Dimon, chief executive officer of JPMorgan Chase & Co., said
today that the credit crisis is “maybe 75 percent to 80 percent”
over. Fuld, CEO of Lehman Brothers Holdings Inc., told shareholders
yesterday that the “the worst is behind us.”
Their comments followed similar remarks last week by Goldman Sachs
Group Inc.’s CEO Blankfein who told investors “we’re closer to the end
than the beginning,” and Mack, Morgan Stanley’s chief, who said the
crisis will probably last “a couple of quarters” longer.