What Happened to the Fed's $1.816 Trillion Lifeline?

by: New Low Observer

The figure in the title of this piece is the amount of money committed by the Federal Reserve Bank since December 17, 2007 until September 23, 2008 in an effort to boost confidence in the financial system. Since December 17, 2007, we've had the failure of Bear Stearns (NYSE:BSC), Fannie Mae (FNM), Freddie Mac (FRE), IndyMac Bank (IMB), WaMu (NYSE:WM), Wachovia (NASDAQ:WB), Merrill Lynch (MER), and various other financial institutions, which would have failed, but were sheltered in some way or another.

The above figure of $1.816 trillion is the amount that the Federal Reserve has committed to no avail. This does not include the many decreases in the discount rate and Fed Funds rates. These rates have fallen as dramatically as the Fed's tab has increased. Sure, not all of the money went out at the same time and not all of it was evaporated into nothingness. However, $1.816 trillion is the amount that has been holding the hands of weak or hobbling financial companies. Did it stop the bleeding? Of course not. Which is the reason why the Treasury felt the need to step in, bail out AIG (NYSE:AIG), and ask for $700 billion as the first of many more requests for funds to “save” the financial markets?

As a market historian and participant, I know that no amount of action like restrictions on short selling or throwing money at the problem will solve anything. Notice that the ban on short selling didn't stop WaMu and Wachovia from falling 95% after the ban was put in place. We cannot seek solace in the fact that our Congress feels compelled to commit an additional amount of $700 billion to the problem. Not only that, giving the Treasury Secretary immunity from criminal charges while handling the nation's purse strings seems troubling, to say the least.

The markets cannot correct themselves until the bailout efforts stop and the market resolves the problems that we're experiencing. We as investors can only hope that we're better than Japan in resolving the exact same problem that they experienced over the last two decades. If we're not equal to the task at hand then we might be fated to experience a similar 18 year recession (depression) which included Japan's stock market falling from the 38,000 level in 1989 to the current level of 11,000.

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