A rant for all those who rent or might have to rent from Tanta at Calculated Risk. Be sure to check out the comments as well.

It was not what we wanted to post for essay of the week, but sometimes you have to give way to current events. As everyone who has not been living under a rock knows, the major story of the week is the dramatic collapse of Bear Stearns. Since it is likely to heavily influence the news next week, we have decided to make this essay from Naked Capitalism essay of the week.

We do this with reluctance. Naked Capitalism has the best overview of the types of problems that are bound up in the Bear Stearns collapse, but we really think this issue has been overhyped. This problem will not end the world as we know it no matter what the traders on Wall Street think. As long as China, Japan, and Brazil are willing to buy treasuries at almost any price, then the US government will have plenty of money to throw at any problem. When you see a sharp rise in the interest rates on treasury bonds, then you can start screaming if you are so inclined. Until then save your breath.

Don’t get us wrong. The Bear Stearns collapse is not good news. But the thing that has kept this crazy house of cards afloat has been the fact that the US Federal Government has been able to pay historically low real interest rates on its debt even as it was running a record current account deficit and spending money on guns and butter like there was no tomorrow. Until that stops, things will still be reasonably all right in the US.

For that reason, a case could be made that it would be better to select this piece from Econbrowser on the TSLF, this piece from Brad Setser on central bank intervention, or this piece from Demography Matters on China’s inflation and labor shortages. All three of those essays talk about issues that will still be important next year when everyone will have already forgotten about Bear Stearns and are freaking out about other issues.

But since we live in the now, and not in the future, and since most people don’t have the time to read more than one essay in their spare time, it seems best to encourage people read Naked Capitalisms take on the issues raised by Bear Stearns collapse so that people know what the issues are.

From Reuters….

“You can safely assume that Bear is not alone here,” said an interest rate strategist at one European investment bank in London, who declined to be identified.

“We have been setting prices in swaps markets in recent days that were designed to say ‘no deal’ and at least one other U.S. investment bank — not Bear — dealt. That is very worrying if they needed the cash that badly. We have been forced to review our counterparty limits ever since.”

From the Independent……

A Goldman Sachs trader in New York said: “Everyone is in a total state of shock, aghast at what is happening. No one wants to talk, let alone deal; we’re just standing by waiting. Everyone is nervous about what is going to emerge when trading starts tomorrow.”

In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: “We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it’s a self-feeding disaster.” Mr Taylor, who had been relatively optimistic, has turned bearish: “It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on.”

Mr Taylor added that he expects a sharp downturn in the real UK economy as the public and companies stop borrowing. “We have never seen anything like this before. This is new territory for us. Liquidity is being pumped into the system but the banks are not taking any notice. This is all about confidence. The more the central banks do, the more the banks seem to ignore what’s going on.”

Mr Taylor added that the problems unravelling at Bear Stearns are just the beginning: “There will be more banks and hedge funds heading for collapse.”

The A-Team departed our factory, having established a system–several systems, really, all different–to reduce inventory by hiring more people to handle it. I am not sure they even managed to reduce the total inventory, or just where it was stored. Little matter either way; the next day, P.B. was told to start trimming his manpower. Click Here to continue reading.

Every one got scared today because it came out that Bear Stearns was in danger of going under. But the fed rode to the rescue. Felix Salmon tries to justify the bail out….

While I have a certain amount of sympathy for this tough-love approach to the banking system, in the end I’m quite glad that Ben Bernanke and Tim Geither, softies that they are, went down the route that they did. Not because I think Bear’s shareholders deserve their $30 per share or whatever they’re going to end up receiving, but rather because of the sheer amount of wealth that could have been wiped off the stock and bond markets as a result.

It turns out, you see, that every mom-and-pop stock-market investor is actually, and rather unwittingly, taking investment-bank default risk, then. Which is why it’s nice to have a Fed on the lookout for them. So far, retail stock-market investors haven’t panicked; let’s try and keep it that way, shall we?

But for my money, I think the Naked Capitalism has the right take….

Bear is a large prime broker, which means it lends to hedge funds. It is also a significant counterparty in enough different credit markets that its collapse would have at a minimum caused panic as to who might have been hurt. You’d have a further scramble for liquidity and reluctance to lend, which is precisely the condition the Fed has been trying to alleviate.

In particular, according to Bloomberg, Bear was the second largest underwriter of mortgage bonds, The lead manager (I’m assuming Bear was also a significant lead manager) is the only one who knows where the bonds went and is thus in the best position to trade them. So Bear’s role as an important market-maker may have played into the calculus.

But the answer to the question of whether Bear should have been allowed to tank depends on how long it would take the crisis to pass. Swap spreads were elevated a full year after the LTCM rescue, but here the relevant metric would be how long the acute phase might take. If it was two weeks or a month, and no one save maybe some middling sized hedge funds (or a lot of teeny ones) would fail, that would have been acceptable. But the Fed couldn’t assess this in a 24 hour period. (However, some parties believe that the Fed’s $200 million TLSF was in part to assist Bear; if so, they’ve had at least a week to evaluate this risk. But in that case, I’m not certain they asked the right questions).

I still think Bear should have been permitted to fail. Now every the same size or larger knows the Fed will ride into the rescue. This is a terrible precedent. It also increases the odds of the Fed running out of firepower long before the crisis is over.

Even with the rescue, markets still dropped today.

Supposedly we had some good inflation data recently. Raise your hand if it reflects your personal experience.

Also read this from Naked Capitalism….

What did the Boskin Commission think was out of line? According to Wikipedia:

The report highlighted four sources of possible bias:

Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change.

Outlet substitution bias occurs when shifts to lower price outlets are not properly handled.

Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all.

New product bias occurs when new products are not introduced in the market basket, or included only with a long lag.

So the Boskin report would have us believe that if I switch from steak to hamburger because beef prices are up, we should only capture the change in how I consume (ie, inflation is new hamburger/old steak price, not new steak/old steak). That is patently bogus. Similarly, the outlet substitution seems rife for abuse (“Ooh, the number is going to be really bad this month! Can we find anywhere selling X cheaper so we can put that in the model instead?”).

From USA Today….

Consider Tamara Campbell, who raided her 401(k) after her husband was laid off from his job as an occupational technician, and they fell behind on their mortgage for several months. “If I hadn’t done that, we would have been foreclosed on last year,” says Campbell, who lives in a Denver suburb.

Such hardship withdrawals began rising last year and, by January this year, had exceeded January 2007 levels. During the first month of the year, as the economic slowdown tightened pressure on mortgage holders, hardship withdrawals rose 23% at plans that Merrill Lynch (MER) administers, compared with the same period in 2007, says Kevin Crain, managing director of the Merrill Lynch Retirement Group.

The 401(k) withdrawals are rising mainly because people such as Campbell and her husband want to save their homes. Merrill Lynch found that the primary reason for the rise in hardship withdrawals was to prevent foreclosure or eviction, based on its sampling of applications filed in January.

Likewise, in the first month of the year, compared with January 2007, Great-West Retirement Services saw a 20% increase in hardship withdrawals to save a home. And Principal Financial (PFG) reports that in January it received 245 calls from participants who inquired about 401(k) withdrawals to prevent a foreclosure or eviction, up dramatically from 45 similar calls it received in January 2007.

For workers, the consequences can be severe. About 85% of employers bar employees from making 401(k) contributions for six months after taking a hardship withdrawal, says Pamela Hess, director of retirement research at Hewitt Associates. (HEW) Worse, employees who pull money out of tax-deferred 401(k) plans before age 591/2 generally must pay a 10% penalty on top of the taxes owed.

We were trying to avoid selecting another Sippican Cottage blog post for rant of week. We did not want to make it seem like every rant of the week was going to come from him. But this one was just too good to pass up.

For those that don’t already know it, we should point out that Sippican Cottage lives in the great state Massachusetts. Recently, that state passed a law requiring people to purchase health insurances. That means that if the state deems that you can pay for it, you have to pay for it. Otherwise you have to pay a large fine.

To say that Sippican Cottage was unhappy about this new law would be an understatement. When it was first past he just about blew his top. Now that it has been in place for a while, his rant is not as explosively angry as his first one was. But his rant still has the air a barely suppressed rage as he warns America what to expect from universal health care.

A new job position was recently posted which overlaps my current job. This is happy news, since it should leave me with less to do. But now I do not know what entirely my job will comprise of, and whether it will become more interesting or more dull.
I am eligible to apply for the new Click Here to continue reading.