Monday, March 17, 2008

Japan of the 90's?

The US has become the Japan of the 90's.  Bear Stearns sell to JP Morgan is reminiscient of "convoy system" employed by Japanese banks.  BOA taking over Countrywide.
On top of the Bear Stearns price of $2, the feds gave JP Morgan $30 Billion money-back guarantee!
Only time will tell if losses there are more loses than $30 billion on Bear Stearns balance sheet.
As with Japan in the 1990s, delay in finding a true clearing price for mortgage-backed securities and similar assets could keep uncertainty hovering over the market like a toxic cloud. Banks will stay more interested in fending off potential disasters than in lending money and keeping the economy growing.
It looks like this is one of the things everyone is avoiding at all costs.  No one wants to sell any assets and find the real price.  as the old saying goes - if you are quiet people will think you are stupid, but if you talk, people will know you are stupid. 
That's not to say the Fed should stop cutting rates. Avoiding a prolonged and painful recession is, and probably should be, Ben Bernanke's top priority. As a student of economic meltdowns, from the Great Depression to Japan, he knows that central-bank reluctance to cut rates quickly and aggressively only made things worse.
I disagree.  Rate cuts have only made things worse.  The dollar is in the dumps, mortgage rates are at the pre-October level.  If people loose confidence in dollar, it will mean a higher mortgage and other loan rates.

But if rate cuts aren't enough to inspire heavily indebted consumers to spend and shell-shocked banks to lend, then another ugly feature of the Japanese experience becomes possible: something economists call a liquidity trap, in which easy money does nothing to stimulate economic growth.


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