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What If Bear Wasn't Bailed Out?


Fed move staves off financial crisis.

Last week my writings seemed to ignite a lot of response in the blogosphere. My basic contention was that the Federal Reserve had to act to facilitate the sale of Bear Stearns (BSC) to prevent a meltdown in the markets. Many agreed, but others said Bear should have been left to hang, pointing out that a thorough cleansing is what is needed.

Others scoffed at the notion that allowing Bear to fail would have created a massive stock market sell-off. This week we will reexamine that concept, look at the drop in gold and commodities, come to the defense of Alan Greenspan (which should be food for a little more controversy), and think through to the end game of the economic crisis.

Secondly, as I announced a few weeks ago, I am now working with my friend Steve Blumenthal and his team at CMG to offer a variety of investment managers who can work with investors with less than the $1.5 million needed to be classified as an accredited investor. I am proud of the managers we have on the platform. To see the managers and their returns, and how they are doing lately in this turmoil, just click here and fill out the simple form. The minimum account size is $100,000.

Some have written that they filled out the form and have not been called by CMG. There was a rather large initial response. I suggest that you call after you fill out the form. They will get to you eventually, but a call will speed up the process. And of course, if you are an accredited investor you can go to as always, and my partners will be glad to show you the world of commodity and hedge funds. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC. Member FINRA.) So, without further interruption, let's get to this week's piece.

First, let's look at a few paragraphs from the Outside the Box last Monday. It was my reaction to the Bear Stearns sale facilitated by the Fed. It was short, and you can read the whole piece here.

"If it was 2005, Bear would have been allowed to collapse, as the system back then could deal with it, as it did with REFCO. But it is not 2005. We are in a credit crisis, a perfect storm, which is of unprecedented proportions. If Bear had not been put into sound hands and provided solvency and liquidity, the credit markets would simply have frozen this morning. As in ground to a halt. Hit the wall. The end of the world, impossible to fathom how to get out of it type of event.

The stock market would have crashed by 20% or more, maybe a lot more. It would have made Black Monday in 1987 look like a picnic. We would have seen tens of trillions of dollars wiped out in equity holdings all over the world.

...Yes, taxpayers may eventually have to cover a few billion here or there on the Bear action. But the time to worry about moral hazard was two years ago when the various authorities allowed institutions to make subprime loans to people with no jobs and no income and no means to repay and then sold them to institutions all over the world as AAA assets. And we can worry in the near future when we will need to do a complete rewrite of the rules to prevent this from happening again.

But for now, we need to bail the water out the boat and see if we can plug the leaks. Allowing the boat to sink is not an option. And get this. You are in the boat, whether you realize it or not. You and your friends and neighbors and families. Whether you are in Europe or in Asia, you would have been hurt by a failure to act by the Fed. Everything is connected in a globalized world. Without the actions taken by the Fed, the soft depression that many have thought would be the eventual outcome of the huge build-up of debt would in fact become a reality. And more quickly than you could imagine.

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No positions in stocks mentioned.

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