Saturday, March 15, 2008


Yesterday Chase Morgan bailed out Bear Stearns by buying mortgage bonds insured by the Fed after a run of investors on Bear Stearns. Bear Stearns is a very aggressive investment bank that has built a huge fortune on tenuous speculation like these very same mortgage bonds.

When Toll Brothers try to do something here in Brooklyn, they borrow the money somewhere, which means that they are depending on the same banking system that is currently in genuine and very dangerous crisis. The last run on a bank of this sort was in 1929, and if a domino effect takes control over investors, many of these aggressive far-flung banking operations will be without cash.

A bank without cash is a dead entity. It cannot tread water because it has nothing for depositors much less investors. If a bank is holding a massive amount of worthless paper, like mortgage bonds, they are moving toward the coroner’s slab.

The important thing here is that Chase bailed out Bear Stearns by buying mortgage paper from them backed by the Fed, so while it may look as though BS got shored up, it is really the case that the financial whizzes in and out of government have perpetuated the same stupid system.

Banks should not be investors, and certainly not insurers. They should be conservators of their depositor’s assets. When bankers take a flyer with the public’s money as they did with mortgage paper, the loss is born by their clients who never had a say in the matter. Like many pension funds now, these entities are permitted to gamble with other people’s money. Those people, as in the case of Enron, have to absorb the losses when stupid decisions are made.

Banks are the lifeline of developers, builders, contractors and such so even if the price of real estate holds in NYC as it will relative to the rest of the country; we will take some painful temporary losses. If the idiot banking practices of the last 30 years really come home to roost, that may turn into something that is the modern equivalent of the Depression. If that happens, we will all be very unhappy no matter where you have deposited your assets.

Sorry to be grim, but this administration is not going to address the need to re-regulate banks and put some sort of controls on the sale of mortgages as speculative investments. So we should get ready for a rough ride, though of all the cities in the US, NYC is the most likely to come out in one piece. Most of the value of real property has some genuine base here because there are fewer places to live than people want. That is not likely to change in the foreseeable future.

Of course, if global warming floods us, the value of property will tend to decline rather sharply. What's more you can be sure that no one currently in the White House has any idea what global warming is, nor do they want to be told.

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