In an effort to keep financial firm Bear Stearns from going bankrupt, it was agreed that JP Morgan would buy it out (at a bargain price of $2/share) and that the Federal Reserve would help JP Morgan guarantee Bear's financial obligations.
The hope is that bailing out Bear Stearns will buoy investor confidence enough to prevent the US financial industry from sliding into complete ruin. I suppose this is an effective strategy: if you're an investor, what could give you more confidence in an institution than backing from the guys who print the money?
But it's kind of disconcerting. As this WaPo op-ed points out, there is "abundant evidence from the currency and gold markets that the world has just about all the dollar bills it cares to hold". This suggests that maybe the Federal Reserve's trick of pulling new US dollars out of its hat every time a teetering financial giant needs righting might not be viable if things continue to worsen. And this very fact, of course, will cause things to continue to worsen.
So it looks bad. Though overall prices held steady last month, inflation is up for the year. Stocks are tumbling. Gold is soaring. And Intrade.com has 70% odds that we're heading into a recession this year.
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