New York Times 9/17/08

The central bank has also transformed itself almost overnight into the Fed Inc. by essentially taking over American International Group after already taking on hundreds of billions of dollars in mortgage securities to help ailing financial institutions.

“This is unique, and the Fed has never done something like this before,” said Allan Meltzer, a professor of economics at Carnegie-Mellon University and author of a sweeping history of the Federal Reserve. “If you go all the way back to 1921, when farms were failing and Congress was leaning on the Fed to bail them out, the Fed always said ‘It’s not our business.’ It never regarded itself as an all-purpose agency.”

My comment: To clarify, the two guys who never saw any of this coming are now supposed to have the answers? Unfortunaetly humpty dumpty cannot be put back togther again. I remember having a conversation with a guy during the tech bubble implosion. This guy had worked all over the world building power plants for Bechtel. He had accumulated a few bucks and had it in tech stocks. I asked him why he was so heavily invested in tech and internut stocks when he was 60 years old. This was just as the Nasdaq was beginning to implode and stupid stocks like Dr. Koop.com, Pets.com, and that stupid grocery site that delivered to your house were blowing up.

He said that his “financial adviser” told him these stocks would come back. This guy could not see that it was a FED induced bubble resulting from the low rate environment Greenspan had created due to LTCM and Y2K hysteria and that it was and has not come back. The same thing is happening in real estate and the mortgage market. Its over, its dead, somebody drive a stake through its heart.

The problem is that this debacle is 100 times the size of the internut bubble and no amount of bailouts and BS is going to put it back together again. So Bernanke and Paulson are going to run an insurance company (AIG) and are apparently going to create a whole new bureaucracy to buy bad debt from all these levered institutions.

Where will the money come from? How is this deflationary? How big will the budget deficit become to accommodate this mess? Yeah I have real confidence that this will work. The wild part is that the market is just giving me more opportunities to add to my Prudent Bear holdings. For the record the market does not rally 400+ during bull markets this only happens during short covering rallies. Eric Janzen has an excellent article over at Itulip.com about the Dow/Gold ratio and how it seems to reach a 1/1 ratio every 20 years or so.

John Polomny
The Real Deal