Bear Stearns Bank Run: A Signal of the Next Depression?
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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Comment by jen on 18 March 2008:
Thomas Jefferson was concise in his early warning to the American nation,
“If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”
Comment by Joshua Reyes on 18 March 2008:
This needs to stop.
To say that this is another Great Depression is complete outright arrogance and is a disrespectment to our Parents and Grandparents in the type of lifestyle many of them had to endure.
Back in those troublesome days, Unemployment was over %25!
In other words, 1/4 of the workforce!
Yet right now it’s less than %10.
We must put things in perspective and not use actual amounts, but the relevant percentage rates.
Comment by Alexander Nobles on 18 March 2008:
Joshua… Nobody has stated that we are in a depression. We are currently facing an all too real recession right now. Time will tell what this will actually end up being. If the government did not play their tricks, and we went through a recession 6 months ago… we would have been ok. They have played games and have made the inevitable even worse.
Comment by Shaun Pickford on 18 March 2008:
According to dictionary.com, an economic depression is: “a sustained economic recession in which a nation’s Gross National Product (GNP) is falling and marked by low production and sales and a high rate of business failures and unemployment”
I was simply saying that this may be an indication we are heading into another depression, not necessarily a Great Depression. I am in no way trying to overshadow the Great Depression versus what we are going through today, I am just trying to draw the parallels between the causes of the Depression, and the events we are seeing in our current economy.
I can only hope that unemployment does not reach 25%, or even 10% in America. However, with the current credit “you owe me money” base that our economy has thrived off of for the last few years, it only takes a small gust of wind to send the whole house of cards tumbling so to speak.
Just pay attention to the world around you, do a little bit of research on bank runs and bank failures. It is scary to see the cycles that history tends to go in…
Comment by Republicae on 18 March 2008:
There is a fundamental issue that is facing this country and this economy that it was not facing prior to the Great Depression and that is a total fiat currency that permeates every single structure of the economy. Every fiat monetary system has a finite life-span due to its total dependence and construction upon credit/debt expansion; eventually the foundational debt consumes economic viability within the system. Since every single Federal Reserve Note, whether digital or physical, is a legal notification of a debt obligation and must be borrowed into existence, without an underlying asset backing that debt [except for the "full faith" of the government] the debt becomes a free-formed element within the economy that must be continually expanded otherwise the economy undergoes contraction and dislocation. The problem is that eventually the debt demands far more service than the economy can produce and remain viable; the system ends insolubility.
One of the signs of such stress cracks within the foundation of the fiat monetary system is the inability of the economy to tolerate minor interest rate hikes; as the fiat system approaches its maximum possible life-span, the rate tolerance within the economy will constantly shrink until no tolerance can be maintained due to the overwhelming demand of debt service.
No, what we and the rest of the world are facing is not a Great Depression, it is far more intense and everything that is connected to the Fiat Monetary System will suffer the same fate as the system itself. That fate will follow every fiat system in history, but this time it will be magnified globally to an unimaginable degree.
Comment by akak on 19 March 2008:
Good job and explanation, Republicae! I fear, however, that the corporate-media corrupted sheeple will either laugh at your erudition, or their eyes will glaze over as they scan your post for any further big-government proposals to “bail us out.” I’m afraid the writing is on the wall, and in big, bold, spary-painted letters it says “WE’RE SCREWED!”
I think we will be lucky if we ONLY have another Great Depression just like the last one.
Comment by Andrew Panken on 15 April 2008:
Oh my, the temple of the last great depression was insulted. Take back you comments, you heathen swine.
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