On Monday, the first major bank run on a U.S. bank since the Great Depression claimed its first victim. Rumors of Bear Stearns’ liquidity crisis became a reality as investors began quickly selling off their stock and draining what little liquid assets they had. Bear Stearns had no choice but to basically sell themselves to the highest bidder to avoid declaring bankruptcy or completely closing down and leaving investors totally empty handed. JPMorgan Chase purchased the company for $236 million. The Bear Stearns skyscraper in New York is worth over $2 billion alone, and the Fed’s agreed to guarantee $30 billion of Bear Stearns bad debts, so I’d say Chase got quite a deal!

Of course, the Fed stepped in to avoid any futher bank runs and implemented an emergency rate cut to encourage consumer spending and show that the Fed is willing to do whatever it takes to keep the economy from taking a nose dive deep into a recession. In addition to the Fed’s publicized moves, other behind the scenes things are going on to help (or further hurt) the housing and credit market.

First off, the Government Sponsored Enterprises (or GSEs) that back the majority of loans in the secondary markets, are possibly going to receive a “capital cap” increase, or even an elimination of the cap completely. This means that the amount of capital allocated by the government to the GSEs to purchase loans on the secondary market from lenders may soon increase or even just be written as a blank check for the GSEs to decide how much loans they would like to purchase. With unlimited capital for the GSEs to buy up loans, that means more creation of money by the Fed to fund the purchases, and thus a further depreciation of the dollar and a shift to government socialization of a large sector of the economy.

Secondly, Dick Cyron, the CEO of one of the big GSEs commonly known as Freddie Mac, stated that he doesn’t feel that home prices have stopped declining. According to him, we are finally going through the correction where maybe not every American can be a homeowner. Due to this, GSE backed investment/rental property loans have seen a sharp increase. The era of the renter is arising it seems. Cyron was quoted saying, “We should not be encouraging the GSEs to put people into homes that they’ll end up losing later.” At least somebody in the government gets it.

However, since the GSEs may soon have unlimited money to back loans, and with the subprime collapse leaving only the well funded still standing, the risky credit market it still pushing forward. Lenders are still offering 100% financing and interest only loans, and stand to push them even further with the potential of yet another drastic rate cut today. Fannie Mae, Freddie Mac and Ginnie Mae have yet to cut back guidelines to stop the bleeding. Instead, they are increasing their capital caps and the maximum loan amounts they will accept (this increase was part of the Economic Stimulus Plan recently passed by Congress). So, while Freddie Mac’s CEO, and one lone political candidate, Ron Paul, agrees that the credit market needs to go through this correction, the current government does not seem to.

Bank runs, interest rate cuts, increased government spending, stock market uncertainty…I’ve seen this before somewhere. I hate to be a nay sayer, but one would think that with Ben Bernanke being a Great Depression scholar, he would see the signs and do something to stop the fast downward spiral the economy is headed in.
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