Here's how it's all going down. (Picture from Rev2.org.)
The Federal Reserve prints enough money so that banks can write-off the Big Shitpile and acquire the liquidity they need to make new mortgage loans.
That's what is in fact happening. The Fed has opened its lending facilities to investment banks as well as commercial banks, and is taking whatever junk these guys have for collateral. That's a nice CDO based on Las Vegas sub-prime mortgages you have there, I'll loan you 100 cents on the dollar for it.
It's possible that J.P. Morgan is telling the truth, and the loans being passed to the Fed's hands in the Bear Stearns deal aren't the worst of the worst. But that's just the tip of the iceberg. The IMF estimates there's $1 trillion of dodgy paper about, most of it American (although some is British, which is why the Pound is under $2 while the Euro climbs to near $1.60.)
The consumer aim in all this? To keep nominal home values at a level such that millions more home loans won't go underwater. That is, say your $300,000 home should really be worth $150,000 in a real market, as it should. The Fed pumps enough new dollars into the system that it's still worth near $300,000, and you feel pretty good. Trouble is the $300,000 is really worth what $150,000 was worth before the bailout started. The market has done its job but you don't notice until you do the math.
What we're really creating is a dollar bubble. It's a short-term phenomenon because traders are no stupider than home buyers. Print enough dollars and eventually the buyers catch wise. The hope is that the dollar won't pop until a Democrat is in the White House and he (or she) will catch the blame.
But don't be fooled. My advice:
- Don't buy a new house unless you can get a real distress price, as in a foreclosure auction where no one else shows up.
- Stay out of dollar denominated assets. European stocks are nice. Their underlying value is in Euros, and most Europeans seem to have ducked the Big Shitpile.
- Commodities will go up further, if they're sold in dollars.
- The U.S. recession has barely begun. The housing bubble is just the first step. The dollar bubble is next.
It's likely the next President will be ruling over Argentina.