Thursday, March 12, 2009

The Fed Enabled a Ponzi Scheme

It has been a year since the collapse of Bear Stearns, which was the beginning of the deleveraging.

Listen to NPR, Book Reveals Bear Stearns' 'House Of Cards.'

In short, for twenty years Bear Stearns and other financial banks became fabulously wealth using billions of dollars in fed money borrowed overnight for very low rates and using that borrowed money to buy risky notes, such as subprime mortgages. The profit was in the spread, that is, the difference between the cost to borrow the money and the return on the risky investments. And the riskier the investiment, the higher the profit.

It was a Ponzi scheme in that new money instead of profit was always needed to payoff older promises because the profit was used to finance lavish salaries and bonuses. It worked fine so long as new loans were available, but it depended on refinancing billions of dollars everyday.

But, like a house of cards, it wasn't structurally sound.

In short, our government, through the Fed, enabled a Ponzi scheme and is now using the U.S. Treasury to prop up the scheme.

And companies know that the government will bail them out. Read, The New York Times, The Looting of America’s Coffers, which states:

"Sixteen years ago, two economists published a research paper with a delightfully simple title: 'Looting.'

The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a "total disregard for even the most basic principles of lending," failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors "acted as if future losses were somebody else’s problem," the economists wrote. 'They were right.""

The full title of the research paper is Looting: The Economic Underworld of Bankruptcy for Profit.

Where is the outrage! Are taxpayer really such foobs?

Oh, sorry, you are worried about the earmark bogeyman created by the Republi-cons to distract you from the cause of the economic mess.

Why do I pay my taxes?

UPDATE: Read The New York Times, A Tsunami of Excuses, for more proof that greed caused the economic mess.

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