But anybody short the buck is smiling

“Insured depositors are the wards of FDIC. Before August, FDIC would have had significant priority on the assets of a failed bank, selling off that bank’s assets to pay insured depositors. Unsecured commercial paper holders, bond investors, stockholders, and other creditors could only take what was left. The exodus of debt investors from the funding of mortgage originators like Countrywide and their replacement by FHL Banks at the head of the queue fundamentally changes this order. FDIC now only gets its pickings after the FHL Banks and the additional $200 billion in financing they have provided. This makes it more likely that, in the case of multiple bank failures, FDIC will not get a large enough slice of the pie to pay off insured depositors.”

http://www.mises.org/story/2772

FHLB debt does NOT carry an explicit USG guarantee.

http://www.fhlbboston.com/aboutus/thebank/08_01_04_fhlb_system.jsp

You can’t artificially prop up real asset values indefinetely. Concerning the wealth effect: the real material effect is in housing because:
-it’s the biggest investment most people will ever make;
-it’s highly leveraged;
-emotional attachment to “shelter” is bigger than to a stock portfolio.
-it’s not a “long-term” investment per se (as a retirement fund)if you value “mobility” (e.g. the freedom to move for job or other reasons, without taking a loss)

The macroeconomic impact from housing is far larger than from the stockmarket, becasue housing is more equally distributed than stock holdings (the rich suffer the most).

There is no question the taxpayers are “gonna take it.” I think the purpose of Bernanke’s gambit was to try to lower the eventual amount that we all “have to take.”

I, for one, think that this intervention WILL lower the amount we’re gonna have to take. Will it lower it from the trillion it would have been to the $100 billion it will be (I am making these numbers up!)? Who knows.

But as “inappropriate” as it may be, it’s good also to keep in mind that if stock indexes are kept more stable (eg, backstopped at 11,500 rather than the 10,500 they might have reached), THAT may “refund” us taxpapers, at least collectively, if not individually, some of what we’ll all have to pay. This was probably also taken into account (yes, I know the Fed is not supposed to take this into account) when the Fed was calculating its own “return” on its 200 billion “investment.”

And the reason the stock market is important from a macroeconomic perspective is that instead of being just the “result” of a recession, it can also “cause” one, or cause one to be deeper or longer if people stop spending because they feel poorer.

Whatever we say about the longterm effectiveness of the Fed’s intervention, I think we can all agree that if backstopping the recent slide was an objective for the macroeconomic reasons I stated, it succeeded (perhaps too much).

My guess is that the rise in the indices yesterday was worth more than $200 billion in market cap.

Jack Yetiv

At the heart of things, this is about insolvency, and the only way to cure that is to let ‘em fail. The Fed’s problem is that it is charged with the ultimate responsibility of preventing the collapse of the banking system, and the idea of “letting ‘em fail” kind of runs counter to its charter. Ultimately they must let some fail and keep others alive. That’s what I think it will come down to, but they are not at that point yet. They still think they can save the system by buying time.

We all know that that is not going to work. There’s no question that US taxpayers are going to be told to bend over and take it.

Hell, we already are.

But Greenspan made the mess.