According to the Reuter’s article “Buffett says Fed avoided chaos in Bear bailout”, WB is to have said:

“I think the Fed did the right thing in stepping in on Bear Stearns,” Buffett said at the annual meeting of his Berkshire Hathaway, Inc. insurance and investment company. “Just imagine the thousands of counterparties around the world having to undo contracts.”

Of course WB is going to say that because the fallout from such a crisis would have severely and immediately affected Berkshire’s businesses and investments. But, was this bailout really good for everyone?

Remember, for every action there’s a reaction.

Who do you think is eventually going to pay for the Fed’s economic stimulus and bailout of the fat cats on Wall Street? Right, it’s ALWAYS going to be the average American taxpayer. Those especially hit the hardest will be in or near retirement age, whose savings are allocated to income investments (e.g. bonds, money-market funds) or are used to generate income for daily living expenses.

How’s that?

1. In order to “stimulate the economy”, in just a few months the Fed has quickly lowered the federal funds rate from over 5% to a recent low of 2%, which is now much lower than the 4% rate of inflation. After accounting for the rate of inflation, it will now “cost you money” to keep your savings in a savings account, CDs, money-market funds and bonds, all which many retirees depend on for “safe” monthly income. I believe Wall Street refers to this as “negative growth”.
2. On May 1st, the treasury announced their semi-annual earnings rates on the I-bond savings bond (government-issued inflation-protected savings devices). The fixed earnings rate, which continues for the life of that bond, is 0%. Yes, that’s ZERO PERCENT. Are you encouraged to save yet?
3. The government can’t issue money without incurring some sort of consequence. The main consequence of lending (or giving away) money it doesn’t have is called “inflation”. Just as income from our “safe” investments is being lost, the cost of living for the average American is starting to skyrocket. As inflation kicks in, it’s going to cost you more for food, gas, and other goods just when your income to buy them is reduced.

So, how does the government expect to get out of this mess it’s created?

Well, lo and behold, the Bush administration has recently announced that it will be re-instituting one-year treasury bills, something they did away with after the Clinton administration responsibly balanced the budget and created a surplus when they were running the country. According to a Yahoo! Finance article:

The government is looking for various ways to borrow the billions of dollars in extra cash it will need to cover a budget deficit that is expected to jump to an all-time high this year, surpassing the old mark of $413 billion set in 2004. Private economists are projecting that the deficit for this year could surge as high as $500 billion.

It seems as though the government is outrageously expecting the average American to bail them out. They’ve even targeted us middle-class huckleberries by lowering the minimums to only $100.00. But this plan may have also have unexpected consequences.

Where’s the incentive to buy these treasuries?

The fixed rate on I-bonds is now at zero percent, 3-month T-bills are yielding 1.5%, 6-month T-bills at 1.68% and 2-year notes at 2.45% - all well-below the inflation rate. Only the very long-term bonds are offering any type of half-way decent yields, but they’re all still yielding far under 5%. If inflation continues to rise, even the long-term rates won’t have any appeal.

Unless the Treasury offers some kind of unprecedented yields on 1-yr T-bills, this plan will backfire too.

So, after you recognize that you’re experiencing difficulties in your activities of daily living, remember to ask yourself: Was government bailout of Bear Stearns the right thing to do? I don’t think so.

According to Sunday’s (yes, Sunday) press release:

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

The market should react according on Monday.. hang on. It’s already tanking in premarket.

Any bets that they reduce rates 75 basis points on Tuesday?

After an emergency meeting, the Federal Reserve (FOMC), who’s been telling us that the economy is in good shape, decided to cut interest rates by it highest one-time rate cut in over twenty-years.

Note that this emergency rate cut comes (suspiciously) only after a global stock sell-off and one week before it’s normally scheduled meeting.

Anyone still think that the Fed doesn’t work for Wall Street?

After climbing all week based on the expectation of the Federal Reserve cutting rates, the stock markets dropped like a rock today after the Fed did exactly what was expected. They cut the federal funds rate to 4.25 percent from 4.50 percent and also cut the discount rate to 4.75 percent from 5 percent.

One would normally embrace this as good news. So, how did the market respond? The Dow dropped 2.14%, Nasdaq down 2.45% and the S&P 500 fell 2.53%. Crazy huh?

Just to put it into visual perspective, here are their respective 5-day charts.

As Jerry Lee Lewis might have said “there’s a whole lotta shaking going on”. A whole week’s worth of market gains wiped-out in just a couple of hours, and for absolutely no valid reason.

Although now being reported in hindsight, it seems as though many Wall Street traders wanted a bigger rate cut and pulled out when it didn’t materialize. Seems as though the quarter-point rate cut just wasn’t enough to allay their recession fears.

Today’s negative reaction shows just how much irrational speculation is really going on these days, and how risky things have become. I’m glad I’m still sitting on the sidelines.