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The Federal Reserve joins with world central banks to slash interest rates, which are already very low. The Fed is buying commercial paper -- short-term debt that companies use to finance day-to-day operations. Now the government is thinking of taking ownership positions in U.S. banks, as Great Britain is doing, and ailing Iceland has been forced to do. These moves come on top of rescues of Bear Stearns, Fannie Mae and Freddie Mac, A.I.G., ad nauseam. Despite all this liquidity that has been pumped into the system, the stock market hasn't responded (although it has to stage some kind of rally soon; markets never go straight up or straight down.) The Fed has poured $800 billion into financial firms, and that doesn't include the $700 billion bailout package, $200 billion for Fannie and Freddie, etc. Finally, some analysts are stating what may be obvious to the public: perhaps most banks are technically insolvent. The actions by the U.S. government and Fed certainly suggest this. The banks are laden with worthless derivatives they can't dump in this market. Says former San Diego economist Arthur Laffer, "The Federal Reserve's unprecedented decision to buy commercial paper directly from the market confirms the fears of market participants that the banking system faces a chronic capital shortage -- that is, a solvency problem." The credit crisis and the Fed's running of the printing press to ease it will not come without pain: Says William Gross of Newport Beach's PIMCO bond management firm, "Expect a lengthy recession but not depression, accelerating government deficits approaching a trillion dollars...and the eventual rise of inflation" and long-term interest rates.

Comments
10

Response to post #2: My angst is padded with cash, at least for now.

Oct. 10, 2008

Whatever happens I'm glad to have been through a few bear markets/recessions; it helps me filter all the news. What would the credit card ads say about that? "Experience: priceless."

Oct. 9, 2008

Response to post #1: It's great to have experience in several things -- sex, for one -- but it's not so great to have experienced so many bear markets, particularly since the recovery from this one may be slow. Stocks have dropped 40 percent from their all-time highs a year ago and 20 percent in the last week or so. With experience under your belt, you don't suffer the angst of the younger people. But get ready for some angst, even for an old pro such as yourself. Best, Don Bauder

Oct. 9, 2008

My experience working for RTC tells me that greed is a constant factor in extreme financial collapses.

Right now, we are looking at the hazard with the highest risk profile in the form of our own volatile economy, and there's nothing in the National Response Framework or the National Strategy for Homeland Security that is in any way prepared to respond to a modern Great Depression as an economic catastrophic incident complex of national significance (FEMA's terminology, not mine).

Oct. 9, 2008

Response to post #3: In particular, our young people are accustomed to overspending and piling up too much debt. A depression would be devastating. Also, unlike the 1930s, few have family farms to return to. Remember, I am not predicting depression -- just warning of the possible consequences. Best, Don Bauder

Oct. 9, 2008

Response to post #5: Make sure you're in a safe MM fund, if that's what you're in. Best, Don Bauder

Oct. 10, 2008

The fallout of this WORST market week in history will be millions of layoffs, a huge drop in real estate prices (on top of current decline). It is feasible a $800,000 tract home in 2005 will go as low as $200,000. Brandes and many other managers may have to close up shop as investors want their money back after losing a fortune. Tourism in San Diego will grind to a halt. San Diego will sink into a depression as the biotech industry cannot find anyone to give them money. Unemployment will soar to 20% or more. This depression is going to be a doozy. You cannot wipe out $10 Trillion in life savings and not have it destroy the economy. I have been murdered and thought I was somewhat defensive. The U.S. is done as we know it.

Oct. 10, 2008

Response to post #7: People are now getting their 401(k) statements, and many are as are depressed as you are. It's true these market collapses, and the freezing up and closings of financial institutions, have similarities with the 1929 crash and following Great Depression. But there are a lot of differences, too. A re-run is possible, but not probable. Best, Don Bauder

Oct. 10, 2008

Response to post #9: I'm the same age as McCain (several months older, actually), and I have 25 percent of our portfolio in common stocks -- almost all yielding more than 4 percent when purchased. The stock portfolio is obviously down, although I'm ahead from where I was in March of '03 when I raised the equities portion to 25 percent from 10 percent, as the market plunged before the Iraq War and I looked for a rebound. Maybe I should have cut that percentage in recent months. However, I use stocks yielding 4 percent or more as a substitute for cash that is paying around 2 percent, knowing that I might get eviscerated in a market such as today's. Best, Don Bauder

Oct. 11, 2008

Don, I'm one year older than Senator Obama, and the cash is in FDIC-insured savings accounts and a CD. Right now, better to sleep well than eat well.

Oct. 11, 2008

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