Last Friday, the Fed made $35 billion available to large investment banks to make overnight, low interest loans. This is a direct injection of cash into the investment world, and something just short of a sign of panic. The last time this was done was immediately after 9/11.
What does this mean? For starters, it means that the fallout from the mortgage meltdown is expected to worsen. American Home Mortgage, which was the tenth largest underwriter, filed for bankruptcy protection on Monday. Many large investment houses, especially Goldman Sachs (Gold in Sacks) placed large bets on mortgages called “derivatives” that were essentially selling the future income before it arrived. Then, it didn’t arrive. Foreclosures are about more than evicting people from their houses; they also evict a lot of workers from their cubicles, too.
What bothers me about this whole situation more than anything is that the Fed is setting up a situation where they take care of failure for the largest investment houses. This takes risk out of the picture. In the long run, stupid money will continue to chase stupid, unproductive things if it has no reason to believe that their decisions will ever fail. And stupid money drives out smart.
I think that Jim Cramer, a person I don’t generally like, said it (or rather shouted it) best of all: “These people had no idea what they were doing!” He’s right. But that doesn’t mean that the market will punish them all that severely for what they have done. The Fed can’t let them fail, or so it thinks, and so it has pumped a lot of money into the market to keep it stable. Has anyone paid attention to the collapse of real estate in Japan, circa 1990?
I understand that I’m just one novice watching this from afar. My personal feeling, that it’s time to put your money into things that are highly portable or consumable, may not be right. But I now joke a lot about “Junk silver and tuna”, which is to say stocking up for a complete collapse with tradable, hard currency (junk silver describes silver items like coins worth only their silver value) and stuff you can live off of (preferably in cans). If the stupid money is allowed to run the show, it seems to me that we are not a long way from a real problem.
If the Fed becomes an agency that’s all about looking out for stupid money, we’ll come to a point where there is no smart money. That means no real investment in things that make a real, honest dollar. That’s what a depression looks like.