There’s a Subprime Bailout Alright
There is now a great deal of speculation about whether, and to what degree, the government will bail out the sub-prime mortgage market. Well, it has already happened. The Fed did it last week when it flooded the market with money and cut the discount rate.
This wasn’t quite the bailout some people argued against, but it was a bailout nonetheless.
Once again, the Fed bailed out Wall Street.
It seems like a routine event now. Wall Street will shill anything they can come up with. In this case, it was packaging risky mortgages into bonds, tranching the bonds so they’d get excellent bond ratings, and laughing all the way to the bank.
Next, the inevitable happens and it eventually collapses. Wall Street then implies that grave damage to the entire U.S. (no, world) economy will result if ’something isn’t done to restore confidence.’ The Fed, a supposedly apolitical body, knuckles under and begins the bailout.
Fed chairman Bernanke can’t do the right thing and let the situation play out, because the U.S. economy is so drunk on credit there’s a risk a recession will result. So he does what any good politician would do - takes the easy answer for today that comes with a more painful tomorrow (inflation).
I see inflation as a real threat to the U.S. economy now. I thought that before, but I think the risk is even higher now. Here’s to hoping I’m wrong.
