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.

Now, you can read news about Americans being overburdened by debt everywhere since the uncovering of sub-prime loans debacle and economic slowdown.

But, even after all of these debt problems surfaced, attempting to become debt free, or non-dependent upon credit, is still not an important issue to many individuals and businesses.

For example, I recently finished reading Jon Markman’s MSN Money post, “As loans dry up, so will economy“, and would have commented on it there, but direct comments weren’t available. So, I thought I’d comment on it here. My opinions don’t differ much from Jon, but let me present his case in a little different perspective.

When I read what Jon wrote about tightening credit,

Credit is the fuel of industry, and it is a vanishing resource despite a campaign of unprecedented swiftness by the Federal Reserve to slash short-term interest rates. As it disappears from the landscape, so, too, will hopes of a broad, lasting recovery.

it caught my attention that we Americans still don’t get it. We’re still seeking to continue on the same path of dependence upon credit that got us in the mess that we’re in today. Instead, we should be seeking ways to become debt-free. Becoming debt-free, and having a large cash emergency fund (or reserve), is what every individual (and business) should consider a priority.

Jon also wrote:

The family-owned maker of Alpenlite-brand motor coaches and campers had survived every bad economy and spike in oil prices since 1971, but it had to shut down when banks yanked its credit. Without the ability to borrow to buy parts and maintain payrolls during a period of seasonally soft sales, as it has always done, a wonderful small business went poof.

This is where Jon’s and my perspectives differ. It’s seems as though blame for this family-owned business failure is being attributed to the ongoing credit-crunch, and the inability of the company to borrow money. He blames the banks’ decisions not to lend for the company’s failure.

Of course, I have to disagree. I would think that the company managers’ inability to budget is responsible for it’s failure, not their inability to borrow. Why do I think that?

As Jon wrote, this company has been in business since the 1960’s and has seen it’s share of hardship over those years. In all of those years of business experience, shouldn’t it have occurred to management to save money for the lean times, and not become dependent upon someone else to keep their company afloat?

You can’t tell me that in over forty-years in business this company couldn’t have put away a little cash reserve each year, eventually creating a buffer big enough to cover their bills or any unforeseen circumstances. Just like the old “ant and grasshopper fable“, we would expect this of individuals, why shouldn’t we expect this of businesses too?

Like I said, many we Americans just don’t get it. Credit was so easy to get in the past that it just became easier to depend on easy credit, and not be concerned with saving for the future. Now that credit isn’t so easy to get, we’re mistakenly blaming others for our own shortcomings.

Have we learned nothing from the sub-prime fiasco?

So, while I agree with Jon’s assessment that credit is the fuel of the industry, it shouldn’t be. Credit may be essential for start-up companies, but established businesses should know better than to depend on credit, or to be overburdened by debt.

It wouldn’t be right if I didn’t own up to being wrong about my last couple of forecasts. Plus, how could I bash the experts if I hypocritically excluded my own faults? So, let me highlight my mistakes:

1. About a month ago I predicted the market would quickly take a turn for the worse. The market did just the opposite, and is now close to making up it’s first quarter losses.

2. The past few weeks I predicted corporate profits would tumble. While earnings were mixed and lower than last year’s results, earnings came through much better than I expected.

3. At the beginning of last year I celebrated being “back in black“, but now I’m back in the red after this past month’s comeback.

Three bad calls.

Now call me crazy, but I still don’t think my forecast is wrong on the economy and where the stock market’s headed. I believe it’s only my “timing” that’s incorrect. I’m still of the opinion that the stock market’s headed south, and I’m still 100% in cash.

I’ve been invested in cash for a while now. Time will tell if I’m correct.. or just plain crazy. So, stick around to find out. Until then, I think the following music video best describes my feelings about this past month.

As so much of American’s daily existence depends on cheap oil, Dr. McPherson predicts peak oil spells the end of civilization. But, if it’s not already too late, perhaps it will prevent the extinction of our species. According to his Arizona Republic viewpoint:

The world peaked at 74.3 million barrels per day in May 2005. The two-year decline to 73.2 million barrels per day produced a doubling of the price of crude. Later this year, we fall off the oil-supply cliff, with global supply plummeting below 70 million barrels/day. Oil at merely $100 per barrel will seem like the good old days.

Within a decade, we’ll be staring down the barrel of a crisis: Oil at $400 per barrel brings down the American Empire, the project of globalization and water coming through the taps. Never mind happy motoring through the never-ending suburbs in the Valley of the Sun. In a decade, unemployment will be approaching 100 percent, inflation will be running at 1,000 percent and central heating will be a pipe dream.

He makes a very logical case for his opinion. It’s scary in that perhaps anything’s possible, but weirdly amusing in it’s presentation. I’m sure that most people think he’s crazy, but I know everyone hopes he’s wrong.

Keep in mind that, only about six months or so ago, the President and his yes-men were saying that the economy was in excellent shape and that we shouldn’t be concerned. Now, in just six months time, they’re saying that they need to overhaul the whole financial system in order to oversee financial market stability. That’s quite a dramatic swing, wouldn’t you say?

It’s too late now, but IMO, the best thing the government could have done during this crisis would have been to take a laissez faire approach and let the markets work out things for themselves. Now they’re looking to cause more problems, and cost taxpayers more money, instead of just letting the pieces fall where they may. This whole mess has got me thinking that maybe even Nouriel Roubini may not be so overly-bearish is his economic outlook.

Being the skeptic that I am, I’m leaning towards the idea that Monday’s announcement of the financial overhaul plan is just a wag-the-dog political ploy created to appease the scared and irate masses, and to help keep Republicans in office this election year. But, I could be wrong.. this may only be an insane idea.

My prediction? This plan never materializes.

According to a Gallup Poll released today:

The percentage of Americans saying they worry “a great deal” about the economy has surged by more than 20 points over the past year, moving the issue from 6th on the list of 12 national issues measured in 2007 to tied for first today with healthcare.

The only other issue for which Americans’ level of concern increased a significant amount since 2007 is unemployment, a major economic sub-issue.

When combined with this week’s Consumer Confidence Index, the data shows Americans are more worried than they’ve been in many years.