Thursday, April 3, 2008

Welfare for Wall Street

Open Markets or Welfare

On Tuesday, March 11, 2008, the most remarkable transfer payment from the Federal Government to Corporate America occur ed. The United States Federal Reserve, operating through the Federal Open Market Committee and in response to a deep and severe credit crisis on Wall Street, developed a very unusual plan to exchange United State Treasury Bonds for AAA Mortgage Backed Securities. Because of this blatant market manipulation, wall street responded with a 400 point rally. .
In my best selling book "The Angry Black Man's Guide to Success," I state that one of the rules is to being successful is understanding that "People do not do what they have to do, they do what they want to do." In the same vein, the Fed did not do what they have to do, but what they wanted to do. Instead of doing what they have to do, maintain free and open markets, let Wall Street firms and hedge firms take the fall for investing in mortgage backed securities, and let the stock market continue a freefall that started on Friday, March 7, 2008 of more than 250 points, the Fed interfered in free markets by exchanging Treasury bonds for securities of very little value. Congressman Barney Frank(D)MA went ballistic because the same deal is not being offered for municipal bonds.
Lets me break it down. Lets say you have a General Motors automobile which you paid and financed for $30,000.00 for in March 2007, and the vehicle depreciated to $25,000.00 by March 2008 but your loan balance remained $29,500.00. Car salesman generally refer to this as being upside down. Well, GM sees that you are having trouble making the payments and wants to help and therefore they offer to exchange your payment booklet for $30,000.00 in GM stock that you can then pledge or sell and still keep the car. WOW! What a deal. You can trade a liability for an asset. The Fed is acting like a pusher and Wall Street is responding like an addict, sniffing up all the coke in the room.
Wall Street celebrated but those of us who truly believe in capitalism see a very sad day. First, hedge funds and investors will only see this as a way to take quick profits, liquidity will not return to the market, and the Stock Market will continue its steep decline through the second quarter. Its not wall street that will stop this recession, but consumer confidence. I believe the Fed should continue to cut rates but not interfere in open markets. Like a junkie, wall street will pull back until the Fed provides the next hit.
Fast forward to May 2008 and now the Fed wants to pay interest on reserves to help support bank capital that does not exist. I would call this a Mickey Mouse move but that would insult the Disney. The Feds bag of tricks is running out.

George Farrell
The Angry Black Man's Guide to Success
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