Vol. 72/No. 15      April 14, 2008

On March 16 the Federal Reserve conducted a forced sale of Bear Stearns. The failing Wall Street investment bank was sold for a fraction of its listed stock value to banking monopoly JP Morgan Chase.

That same day the Federal Reserve began lending directly to top Wall Street firms. Those loans averaged over $31 billion a day in the first three days.

Today the Treasury Department released details of a plan that would consolidate several financial regulatory agencies and increase their powers. The Federal Reserve for the first time would be able to examine the books of brokerage firms, hedge funds, commodity traders, and other financial institutions.

The Treasury Department’s summary of the plan said that under the current structure, designed mostly in the 1930s, “no single regulator possesses all of the information and authority necessary to monitor systemic risk, or the potential that events associated with financial institutions may trigger broad dislocation or a series of defaults that affect the financial system so significantly that the real economy is adversely affected.”

Since the Great Depression in the 1930s, the federal government has regulated commercial banks, which hold customer deposits. But other financial institutions have faced much less stringent government oversight.

Commercial banks no longer have the assets or weight they used to have. Investment banks are a much bigger and more powerful component of the financial system.

Today only 20 percent of loans are made by regulated banks, Allan Sinai, the chief global economist at Decision Economics, told the New York Times. Investment banks, mortgage brokers, and other bank-like financial institutions account for the rest.

Meanwhile, signs point to a deepening recession in the U.S. economy.

Home foreclosures continue to increase. Nearly one-third of those who took out high-interest “subprime” loans in 2005 and 2006 are unable to pay them. Nearly 9 million homeowners have mortgae debt greater or equal to the value of their home. The amount of equity held on average, compared with debt, has fallen below 50 percent for the first time since 1945.

In January 2007, 5 percent of home sales in San Diego were foreclosures. In January of this year, 34 percent of existing home sales were foreclosures.

“We are still in the early innings of the bursting of the housing and credit bubbles,” financial commentator John Mauldin wrote in his weekly newsletter.

The government agency charged with insuring bank deposits is increasing its staff in the division that handles bank failures by 60 percent, the Associated Press reported. Analysts are projecting 150 bank failures over the next three years. There were five in 2007 and none the previous two years.

Meanwhile, price inflation continues to reduce workers’ take-home pay. According to a study by the Washington Post, prices for necessities like gasoline, groceries, and health care have risen 9.2 percent since 2006.

Dairy products are 15 percent costlier. Prices for fruits and vegetables are up 10 percent, and bakery products are up 8 percent.  
 
 
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