U.S. stocks plunged for the third day this week after Bear Stearns Cos. required a bailout from the Federal Reserve and JPMorgan Chase & Co. to avoid collapse.
Bear Stearns, the second-largest underwriter of U.S. mortgage bonds, tumbled the most ever after the brokerage said it ran short of cash, spurring concern other banks lack funding.
Every ten years something like this happens, where a financial Ponzi scheme eventually collapses under its own weight, and the taxpayers are forced to bail it out. After a while, you have to assume that it's deliberate, that the Masters of the Universe have figured out the perfect grift -- innovate creative loopholes in the financial regulation system, devise arcane derivatives (really, just high-falutin' bookmaking, basically figuring the point spread for Jets-Giants) from them, run them and take profits until they collapse, since it's all invented wealth spiralling out of nothing to begin with, and then take further profits on the inevitable bailout.
The key is pegging so many interdependent financial and economic interests on these things that they become too big to be allowed to go under. After the bailout, someone promises to Do Something About It, stern looks are cast, abject apologies are offered, patchwork legislation is hastily devised, applied, and summarily circumvented as the process begins anew. Springtime on Wall Street!
And all without actually having created a single thing of tangible value. It's all IOUs that have value only as long as everyone agrees to believe that they have value, but there is no actual intrinsic worth to these CDOs and SIVs and such. They are merely finding a viable point spread in the diddling of percentages and fractions. They are shuffling gigantic wads of scrip back and forth, nothing more.
This is what happens when all of this phantom wealth, paid for with thin air, is bet on thin air. Think about it -- Carlyle Group's mortgage holdings were about $670 million in actual shareholder funds, but had over $20 billion leveraged, and now collapsing because the bond insurers will go broke underwriting these worthless scraps of paper. Bear Stearns is taking on water for precisely the same reason: they massively, irresponsibly overextended themselves way out on the margin.
These are economic deformities, malfunctions of the market that should not be resuscitated and allowed to perpetuate on the public dole. It's a second- or even third-order scam that ultimately comes out of our pockets. But then, as the saying goes, when you rob Peter to pay Paul, you can generally count on having Paul's support.
The problem is, as we are finding out yet again, we are both Peter and Paul.
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