Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21
Dow Stock Market Trend Forecast 2021 - 3rd Apr 21
Gold Price Just Can’t Seem to Breakout - 3rd Apr 21
Stocks, Gold and the Troubling Yields - 3rd Apr 21
What can you buy with cryptocurrencies?- 3rd Apr 21
What a Long and Not so Strange Trip it’s Been for the Gold Mining Stocks - 2nd Apr 21
WD My Book DUO 28tb Unboxing - What Drives Inside the Enclosure, Reds or Blues Review - 2nd Apr 21
Markets, Mayhem and Elliott Waves - 2nd Apr 21
Gold And US Dollar Hegemony - 2nd Apr 21
What Biden’s Big Infrastructure Push Means for Silver Price - 2nd Apr 21
Stock Market Support Near $14,358 On Transportation Index Suggests Rally Will Continue - 2nd Apr 21
Crypto Mine Bitcoin With Your Gaming PC - How Much Profit after 3 Weeks with NiceHash, RTX 3080 GPU - 2nd Apr 21
UK Lockdowns Ending As Europe Continues to Die, Sweet Child O' Mine 2021 Post Pandemic Hope - 2nd Apr 21
A Climbing USDX Means Gold Investors Should Care - 1st Apr 21
How To Spot Market Boom and Bust Cycles - 1st Apr 21
What Could Slay the Stock & Gold Bulls - 1st Apr 21
Precious Metals Mining Stocks Setting Up For A Breakout Rally – Wait For Confirmation - 1st Apr 21
Fed: “We’re Not Going to Take This Punchbowl Away” - 1st Apr 21
Mining Bitcoin On My Desktop PC For 3 Weeks - How Much Crypto Profit Using RTX 3080 on NiceHash - 31st Mar 21
INFLATION - Wage Slaves vs Gold Owners - 31st Mar 21
Why It‘s Reasonable to Be Bullish Stocks and Gold - 31st Mar 21
How To Be Eligible For An E-Transfer Payday Loan? - 31st Mar 21
eXcentral Review – Trade CFDs with a Customer-Centric Broker - 31st Mar 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Bernanke's Credit Crisis "Nuclear Option"

Stock-Markets / Credit Crisis 2008 Mar 25, 2008 - 07:39 AM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleSeven days and 12 hours after Fed Chairman Bernanke's history-breaking actions, while financial markets continue to gyrate wildly, market pundits continue to debate madly.

Their incessant question: Why?

Why has Bernanke squandered the nation's scarce financial resources to rescue Bear Stearns, a firm thoroughly addicted to some of the most reckless risk-taking in the world today?

Why despite Bernanke's own warnings about the resulting moral hazard — rewarding irresponsible gambling and punishing prudent behavior — has he thrown down the gauntlet and risked creating one of the most extreme moral hazards in U.S. history?

Why did he suddenly break with nearly seven decades of Federal Reserve history and, for the first time since the Great Depression, invoke an obscure article in the Fed's charter to support the junkiest securities in the land?

In short ...

Why Did Bernanke Deploy The Monetary Equivalent Of the Nuclear Option ?

Few investors know the answer to this question. Fewer still know what to do about it.

But you must not be among them. To survive and thrive in these confusing times, you need a sharper understanding of what impact the Fed is — or is not — having and what the next phase of the crisis could bring.

We don't presume to have all the answers. But we do know this:

Despite Bernanke's history-making steps to pump enormous sums into the nation's economy, he has failed to stem the escalating credit crisis.

To see the evidence first-hand, put yourselves in the shoes of an executive at a relatively large American company.

You're in charge of corporate finance. Your job is to borrow money, sometimes lots of money.

But your company doesn't merit an investment-grade rating. So you're concerned about how much money you can actually raise and what kind of interest you'll have to pay.

Here's what happens next ...

May 23, 2007 Before the Credit Crisis

Your plan is to issue 5-year bonds in three parcels — one now, one in a couple of months and a third within a year or less.

The timing for your first bond issue couldn't be better: Investors snap it up. So you easily raise the money you want for now.

Moreover, all you have to pay is 249 basis points (2.49 percentage points) more than the U.S. Treasury Department pays when it borrows money for the same five years.

Considering that the U.S. Treasury has the best investment rating in the world — and that it borrows money at the cheapest rates in the world — that's darn cheap.

In fact, it's one of the smallest premiums over Treasuries that any company like yours has paid in years.

Moreover, this spread — the difference between the interest rate on high-yield corporate bonds and the rate on equivalent Treasury issues — is a key credit crisis indicator .

It gives you immediate insight into the level of stability — or instability — in the nation's credit markets.

It helps tell you, at a glance, whether the crisis is over or not ... whether it's getting better or worse ... and to what degree.

July 30, 2007 Crisis Indicator Surges: More Than Doubles to 576!

Just nine weeks go by. But in that short time, the market environment has been transformed from day to night.

The mortgage crisis has burst onto the scene. Major Wall Street firms are announcing massive losses. Investors are running in fear. And their faith in any private company like yours — whether you're involved with mortgages or not — is shaken to the core.

In the wake of these shocks, the credit crisis indicator explodes higher, flashing red: Instead of paying just 249 basis points more than the Treasury, you now have to pay a whopping 576 points more than the Treasury.

It's one of the most rapid — and most alarming — surges in this critical indicator in history.

August - October, 2007 Fed's First Massive Response: Crisis Indicator Falls to 354

Within days, Fed Chairman Bernanke jumps in to attack the credit crisis.

He slashes interest rates.

He injects massive amounts of fresh money into the U.S. banking system.

He even persuades central banks in Europe to do the same.

And sure enough, it has an impact: By August 23, the premium you'd have to pay for 5-year money over and above the Treasury drops to 395 points. By October 11, it falls to just 354 points.

The pundits on Wall Street come out in droves and declare "the crisis is over." They heap praise on the Fed. And nearly everyone, especially Mr. Bernanke, breathes a great sigh of relief.

But in reality, the crisis is not over. Despite all of Bernanke's efforts, he is unable to get the genie back into the bottle — unable to fully restore confidence or tamp down the festering crisis.

The first telltale sign: He fails to get the credit crisis indicator back down to its March levels.

The second telltale sign: In mid-October, the credit crisis indicator starts surging again.

March 10, 2008 Credit Crisis Indicator Explodes: This Time to 774 Points!

Rumors begin to swirl about troubles at the nation's fifth largest investment bank, Bear Stearns; and unbeknownst to most investors, credit markets are on the verge of a massive breakdown.

In your continuing role as corporate finance officer, your timing to offer a third and last bond issue couldn't be worse:

Instead of paying a premium of just 248 points as you did with your May 2007 issue ...

Instead of paying a premium of 576 points as with your July 2007 issue ...

You now have to pay an exorbitant premium of 774 points!

The credit crisis indicator is deep in the red zone, flashing extreme danger for all credit markets.

Last Monday, March 14, 2008 Fed Deploys the Nuclear Option

Over the weekend of March 12 and 13, the two most powerful economic decision-makers in the nation — Fed Chairman Bernanke and Treasury Secretary Paulson — huddle with Wall Street executives to find a solution to the latest and most lethal threat of all: A meltdown on Wall Street that could plunge the entire economy into a state of paralysis.

The immediate trigger is the feared collapse in $14 trillion of Bear Stearns' trades in an esoteric area called "derivatives." But these high-risk bets and debts are certainly not limited to Bear Stearns. Quite the contrary, as I demonstrated one week ago in " Closer to a Financial Meltdown ," several other big-name firms, including the giant JPMorgan Chase, are taking even greater risks.

March 20, 2008 Crisis Indicator Fails to Decline Significantly: Ends the Day at Nose-Bleed Level of 719!

It's Thursday, March 20. Wall Street traders are anxious to leave early to prepare for the Easter holiday.

Only three days have past since the Fed's announcements of history-making cash infusions into the brokerage industry; two days have gone by since the Fed's three-quarter-point rate cut on Tuesday.

But the credit crisis indicator has barely budged from the red zone. If you had to issue a 5-year bond today, you'd still be paying a nose-bleed premium of 719 points over the equivalent Treasury issue.

Yet despite this obvious failure by Bernanke to ease the tension in the corporate bond market, pundits again declare that "the crisis is over."

Major Lessons to Learn

As Bernanke's funny money flows into the brokerage and banking industry, it's possible that the intensity of the crisis will temporarily diminish and the crisis indicator will decline a bit more.

But the lessons from this recent experience are clear:

Lesson #1
Speed and Acceleration

The credit crisis is spreading quickly and with increasing momentum. Within less than a year's time, the spread between high-yield bonds and equivalent Treasury yields has swung from 249, one of the lowest levels in decades ... to 774, one of the highest levels in decades.

Lesson #2
From Bad to Worse

At each successive phase of the credit crisis, news of failures has bust onto the scene with greater power — first the failure of Bear Stearns' two hedge funds last June ... then the massive losses announced by HSBC, Merrill Lynch, Citibank and UBS ... now the shocking failure of Bear Stearns itself.

Lesson #3
Escalating Fed Response

At each successive phase, the Federal Reserve has responded with ever larger cash infusions, deeper rate cuts and sharper breaks with traditional Fed policy, culminating in the "nuclear option" announced one week ago.

Lesson #4
Diminishing Results

Most worrisome of all, at each successive phase, the effectiveness of the Fed's actions seems to be diminishing.

At best, it is able to bring credit crisis indicators like the high-yield spread back down to their previous highs . But so far, the Fed has been consistently unable to restore the credit markets to the stability witnessed in the previous phase.

Our conclusions are simple:

  • The crisis is far from over.
  • It's likely to get a lot worse.
  • To prevent a massive collapse, the Fed will have to continually escalate its response, injecting ever greater quantities of cash into the banking system.
  • If you haven't done so already, you must get your money to safety now — and our recommendations are unchanged:

Step 1. If you own vulnerable assets, don't be afraid to dump them. If you're taking a profit, pay the taxes. If you're taking a loss, bite the bullet and move on. In either case, just sell. And if you have a personal adviser, be sure to work as a team to reduce your exposure.

Step 2. For your savings, be sure to own ...

Step 3. For protection — and profit — seriously consider inverse ETFs. (See Special_Report.pdf .)

Step 4. Turn this crisis into a potentially massive profit opportunity with commodity ETFs. ( Click here for our emergency online teleconference.)

Above all, stay safe!

Good luck and God bless,


This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

Money and Markets Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules