The Fed has put their money where their mouth is! They've been saying they wouldn't let the financial system fail, even if they had to reduce interest rates and flood the system with liquidity.
That's what they did over the weekend, and will continue to do tomorrow.
Media commentators are calling it a "bailout." It was, sort of. But not a bailout for Bear Stearns. Their employees and shareholders took a huge bath, equity wiped out. Most were required to take some compensation and all bonuses in stock. They used their "wealth" to buy expensive houses in Manhattan and Westchester. Now the mortgage mess will come home to them! What's the monthly payment on a $6 million mortgage?!
But make no mistake. This wasn't a bailout for Bear -- those it definitely WAS a bailout for the system!
I was surprised by the questions I received today -- people wondering if their money in the bank was "safe." Few recognize the difference between "investment banks" and "commercial banks" -- the ones that take your money in insured deposits.
Of course, it's tough to tell the difference these days. The split between the two banking entities that came after the 1929 stock market crash was gradually removed. In fact, JP Morgan, Chase - the company that "rescued" the assets of Bear Stearns is, itself, a combination of commercial and investment bank. By the way, don't worry about the problems spreading to J.P. Morgan Chase. Canny Jamie Dimon carried out the rescue -- but with $30 billion in guarantees from the Fed, just in case he has to write down more of those mortgage assets.
Your money is safe in the bank. The commercial, FDIC insured deposits in the bank. And now the Fed has made sure that all those corporate deals and financings that were done by investment banks are secure, as well.
So, no problem? Not for the next few minutes. Not until the Treasury tries to refinance its $9 trillion dollar debt. Then they'll learn that the rest of the world doesn't want dollar investment that pay very low rates. And they don't want dollars that will be devalued by the Fed's continued liquidity creation!
THEN, we'll see what the Argentinians, and Brazilians, and Mexicans learned when their currencies declined in value because of inflation! Can't happen here? Just take a look at gold, oil, commodities. The world would rather have them, than dollars. But that's a subject for the next blog -- T$
Terry Savage writes a syndicated personal finance column for the 
You were exceptional this morning on WLS and made things clear.
And your video and both books should be required viewing before anyone invests.
SAVAGE SAYS: Thank you!
Dear Terry,
The Fed's action was a bailout of the system. The Fed bailed out the non-regulated "financial institutions" (brokerages, hedge funds, etc.). The final cost to the Fed will not be known until the assets they are forced to take from Chase are liquidated with the taxpayers ultimately at risk!
SAVAGE SAYS: I don't want to be an "apologist" for government intervention. That's 180 degrees from my usual belief. But the "bailout" could have been a lot worse if the loss of confidence grew, and if the interconnected transactions on Bear's balance sheet had to be unwound!
So, saved by the bell, the bill (dollar bill). Now all we have to look forward to is saving the dollar itself! Stay tuned!
Terry, Thank you for your blog. You are one of the few qualified people I trust.
You've answered alot of questions I continually have circulating in my mind as this sad state of the American economy unfolds.
Moving forward, what is your opinion or would anyone else like to offer an opinion regarding what actions if any, can the average American citizen (not consumer) take to protect ourselves from the possible unknowns that may continue to keep unfolding.
In addition, is anyone formulating a workable plan to move the economy in a better direction factoring in the possibility of more unforeseen bad economic situations like Bear Stearns?
I work as Flight Attendant who has been flying internationally for years. I have watched for years the erosion of the U.S. dollar. Now every week it continues to drop.
I bring my own food now as I just can't afford to buy anything - even a cheap meal on my layovers. Should I be investing in Euros?
SAVAGE SAYS: It's late, but not too late, to protect yourself from the falling dollar. One way is to buy FDIC insured CDs denominated in foreign currencies. I've written about that before, so go to my website, click on "read recent columns" and scroll back to about mid-summer last year. Or go straight to www.EverBank.com to learn about these FDIC-insured CDs, and understand the currency exposure you get from them.
At what point does average consumer anger influence government leaders to take action? Instead, we have these top down reactions to financial problems created and experienced by those who can AFFORD to invest in the stock market, let alone those who have reaped huge benefits from doing so?
Let them eat hot dogs! There are many of us who know how to survive without luxuries, without loaded refrigerators and college savings accounts for our children. Let's see if they can feed their kids hot dogs in Manhattan, too--as a meal, not as a "cultural outing". There is a terrifying truth recycling itself: Everything that rises will eventually converge. Recession? What recession?
If the Fed could find its way clear to support the new owners of Bear Stearns with a 30 billion credit line, why couldn't they have done the same for the original owners? Possibly because JPM/Chase has more clout where it counts than Bear Stearns?