Face of Depression in 2008

Federal Bank or Fed (like RBI in India) last week did helped one of the top investment banks (Bear Sterns) going out of business; Bear Sterns was funded around 200 Billion USD to remain in business by Fed in terms of collateral as Bonds.

Why on a Sunday night, Fed Chairman Ben Bernanke came out immediately in the moment when Bear's were losing shareholders or investors, which is anyway a stock trading investment bank - not our savings account or checking account money held in commercial bank or government money going down. Why did Fed did that inspite of Protestors who lost homes did charged Bear's office last week? Fed could have helped them by giving the money to people? 200 Billion could bring these people out of debt..

Do you know the rippling effect which happens when a stone is thrown in the pond.What is this connected to Fed & Bear. Let me explain.

Say if you are a small town, you have few banks, few business (lets take a food store) in the town runs by borrowing money from the bank (You asking why?, lets take an example, if you want rice you go to a shop and buy. But does the farmer have to wait till he gets an order, then plants rice and then gives you, NO. He borrows from a bank, puts that money into land as seeds and then after harvest, wait for profit - Once he gets money, he pays the bank and makes some profit).. You as a customer to these businesses rent a house, use electricity and buy food etc.

Lets say some day banks don't have money to lend or simply they don't lend any further to business or any new business. What happens. Business cant run because they need money to run. So the Mayor of the town will have to import from other cities to feed you. So the money of the town is spend as expense to buy rice or commodities from other towns. If that is the case, think about you buying rice from farmers market and from a super market store. The rice in the super market store might have come from china too :).. so the price is going to be = Price of rice (that may be cheap) but + transportation cost + inventory cost + import duty cost .etc....

Now think about USA... if banks in USA loose money or they run out of business, huge industries in USA would get huge hit and inflation will peak. (This Bear thing did happen in India, you guys should remember. Chit Funds, when few chit funds cheated and the news spread, many people raided other chit funds. So even good performing chit funds would have got hit when people asked their money back.)

My point is, may be only to avoid this, Fed did back up Bear so that, if Bear falls, it may send a false hope across investors - many would pull their money - other investment banks might get affected. This is called Credit-Crunch in financial market, where no one is ready to use their money for anything. And this causes a state, in short named as,DEPRESSION. As in 1929.

Last Week in Wall Street

Market Last week:

Last week was a week of thrill action with the following action taking place:
a. Fed's involvment with JPMorgan to bid for Bear Sterns (Bear Sterns is the fifth largest investment management bank in wall street) to make sure Bear does not file into bankruptcy.
b. Fed cutting interest rate by 75 basis points (i.e., 0.75%)
c. Fed allowing investment bank to borrow under the same umbrella as commercial banks (This means my friends - our money is put to risk) - This has not been done from late 1931 - which was done at that time during the great depression.
d. Fed annoucing to take mortage related securities (shares to say in simple) in turn of borrow money by mortgage related institutions
e. And not the least Goldman and Lehman showing better revenue than predicted. ow ow ow... The American stock market did see a green signal last week - with shares raising - and investors coming back to wall street - This increase showed reciprocal decrease in oil and commodities prices. Good week in general.

But I dont know why but I keep thinking this way... the market is bearish.. which means every body is feared of recession... and market not performing well... meanwhile fed & few others are trying to do something which is keeping the market up and down...

I dont know how many of you guys take dogs for walking... I do... sometimes, my dog becomes too tired that it does not want to move... it sits in a place... and looks at me like "Shit man wont you stop for a minute... let me grab my breadth"... at that moment.. if you understand him... you take a break with him... and few moments later... here we go.. it comes back to action... and we are back home... but if you push him hard at that moment... either it gets angry... or it comes with you.. but you guys drag and drag and spoil a good morning....

I know finance and dog-walking are not related in any sense... but this keeps me thinking that are we trying to push a market which is bearish.. does this mean.. if the Fed runs out of play in their play books... does the market going to recession for sure and there we go... lets sit tight for a year to watch the market coming up?

Anyway, in short.. recession is talk of the town, whether you like it or not... but you do see bar with full of action which was deserted last week...