We've spent a lot of time (see here, here, here, and here for some samples) talking about the Credit Bubble and the efforts by the Fed to keep the financial system and economy afloat. A couple of reminders came through that serve to remind that there is no free lunch. Recently via Business Week:

Bernanke is going further than Greenspan ever did in responding to a popping bubble. He has pulled out all the stops, inventing new ways to pump money into a resistant financial system. ...One measure of the size of monetary stimulus is the expansion of M3, a broad measure of the money supply that includes institutional money funds. Capital Economics calculates that M3 is up 15% from a year ago, the biggest increase in 37 years.

As the G7 (Group of Seven Industrialized Powers) convene upon Washington to discuss and debate a regulatory response to the eight-month old credit crisis, lets see if we can learn some lessons by taking a look back in time to the last time the G7 leaders met in the midst of a financial crisis having its origins in America.

Remember the late summer and early fall of 1998, when the troubles of a single highly leveraged and unregulated market participant, Long Term Capital Management [LTCM], a hedge fund run by the absolute best and brightest that both Wall Street and academia had to offer, supposedly threatened to bring about large scale financial calamity?

With apologies to Shakespeare, "Mr. Greenspan doth protest too much, methinks."

Former Federal Reserve Chairman Alan Greenspan has every right to attempt to continue to attempt to "defend his legacy". That he continues to refuse to accept any degree of responsibility for the current problems in financial markets are also, ultimately, his own business I guess. At the Wall Street Journal press stop, in regards to his own potential role in the current crisis, "Mr. Greenspan says he doesn't regret a single decision." The day before, in the Financial Times, Greenspan's own commentary is defiantly titled "The Fed is blameless on the property bubble."

West Berlin, Germany, June 12, 1987:

...if you seek liberalization: Come here to this gate! Mr. Gorbachev, open this gate! Mr. Gorbachev, tear down this wall!

What happened this past weekend surely was historic and a real game changer. No, I'm not talking about the JPMorgan pouncing on opportunity, at the potential expense of the Federal Reserve via the Bear Stearns deal (As of November 2007, Bear had around $46 billion of MBS/ABS, Fed agreed to take the "most illiquid", i.e the worst $30 Billion of it). Far more monumental is the fleecing that the US investment banks have parlayed on the Federal Reserve.

The US government has effectively become a joint venture partner with the investment banks, one which though provides all, yes all of the upside to the investment banks, while giving the taxpayers nothing except for potential liability for future losses (yes I know technically the Fed is not the government, but they are responsible for printing Federal Reserve Notes (dollars) and those are fully backed by the US Government). The Fed has completely opened up their entire, theoretically limitless, balance sheet for the use of the investment banks, to use as collateral however they see fit in order to attempt to improve their profits (no not reduce losses, improve profits, just in the last week alone, we learned that last quarter, not year, right in the heart of the credit crisis, writedowns and all, Morgan Stanley checked in at $1.55 Billion in profits, Goldman made $1.5 Billion, and even supposedly shaky Lehman made $489 million). Listen to the words of the Lehman CFO herself as to what the Fed will now accept as collateral for the effectively limitless loans they will now provide to the investment banks;

I'm a bit puzzled by some of the underlying thought processses behind those proponents of a massive government bailout of some sort of the US housing industry. On one hand, they seem, for the most part, to be agreeing with the premise that the state of the US balance sheet, whether our private (consumers) or our public (the government) is at minimum unsound and in the long term creates extreme risk. On the other hand, they seem to be saying that the only way out of our current difficulties is to continue to expand credit. Huh?

Via Financial Times (a fine paper in many respects, but can't say I agree with this particular opinion):