http://www.bloomberg.com/…

The world needs more dollars. The United States is preparing to provide them.

In an all-out assault on capitalism’s worst crisis since the Great Depression, the U.S. is taking on the role of both lender and borrower of last resort for the global economy.

The Federal Reserve, which has already pumped out hundreds of billions of dollars, might formally adopt a policy of flooding the world financial system with even more money. The Treasury, on course to borrow some $1.5 trillion this fiscal year, may tap global capital markets for even more to finance a fiscal stimulus package of as much as $700 billion and provide additional bailout money for banks.

“You want to do everything you can when you’re facing the threat of a deflationary breakdown of the economy,” says Michael Feroli, a former Fed official who is now an economist at JPMorgan Chase & Co. in New York. He sees the central bank cutting the overnight lending rate to zero in January and holding it there throughout the year.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are being forced to pull out the stops because the extraordinary actions they’ve taken so far have failed to gain much traction. Credit markets are collapsing, stock prices are plunging and the world economy is sinking into a recession.

As the economy deteriorates, deflation — a sustained decline in wages and prices — is emerging as a new threat. U.S. government figures last week showed that consumer prices excluding food and fuel costs fell in October for the first time since 1982.

1. Deflation is not “a sustained decline in wages and prices” but a decrease in the supply of money and credit. 2. Deflation is not a bad thing. It’s part of the correction. The fractional reserve system responds in this way naturally. While it may harm current debtors it helps soon to be ones. It also helps everyone better afford goods and services as prices fall. It’s in no way a cut and dry scenario.

As Glenn Jacobs over at Adventures of Citizen X explains the possible outcome of the FEDs actions are far worse then what we are currently enduring:

Much of the current strength of the dollar can be attributed to psychology—folks are scared and are running to perceived security.  The demand for dollars is high which is keeping the velocity of money low.  Since more dollars are being held, there are less dollars competing for products.  Hence, the price of products is staying low.  However, as more and more dollars enter the system, there will be less incentive to hold them in savings.  An increase in the number of dollars will result in a bidding up of prices as more dollars compete for the same amount of products.

We are in the first stage of a possible hyper inflationary environment.  The inflation is entering the system, but because of the high demand for dollars, people don’t realize it because prices have not started to rise yet.  In stage two, as more dollars compete for products, prices begin to gradually rise.  However, people still try to hold their dollars thinking that the price rise is temporary and that they will soon drop.  In stage three—the actual hyperinflation—prices are rising so quickly that people spend money as soon as they receive it, causing a negative feedback loop that results in a fiat currency dropping to its intrinsic value, zero.

Let’s hope they aren’t that stupid.

http://www.courant.com/…

The former chief risk officer at investment bank Bear Stearns Cos., which nearly collapsed in March, is now a senior official of the Federal Reserve division that supervises U.S. banks.

Michael Alix, who worked at Bear Stearns for 12 years and was its senior risk manager since 2006, was named a senior vice president in the bank supervision group of the Federal Reserve Bank of New York, according to a Fed announcement.

The appointment is apt to raise questions because of the key role Alix played at Bear Stearns and given the Federal Reserve’s role in Bear Stearns’ sale to JPMorgan Chase & Co. after its breathtaking slide. In his new job at the central bank, Alix will help oversee the financial safety and soundness of banks, which are inspected by Federal Reserve examiners.

The inmates are running the asylum. But we already knew that.

The story is a few days old but it’s worth repeating.

http://www.bloomberg.com/…

Treasury Secretary Henry Paulson urged banks receiving $250 billion in capital injections from the government to use the funds to spur economic growth.

“We must restore confidence in our financial system,” Paulson said at a press conference in Washington. “The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”

With the equity purchases, Paulson is using more than a third of the $700 billion in government support Congress gave him the authority to use on Oct. 3. He didn’t identify any of the lenders. People familiar with the plan said nine companies will get $125 billion: Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp.

Mussolini would be tickled.

Paulson said the Treasury will dedicate $250 billion for boosting bank capital through preferred stock purchases. The regulators said in a statement that “thousands” of financial companies would participate.

Participating banks will need to accept limits on executive pay and so-called golden parachute payments. They also will need to give the Treasury warrants for an amount equal to 15 percent of the senior preferred investment, with a strike price determined by the bank’s share price at the time of issuance.

The senior preferred shares will pay a dividend of 5 percent for the first five years and 9 percent after that, the Treasury said. The purchase price of the stock will be the market price of the banks’ common shares at the time of the transaction. Companies will be able to buy back the equity at par after three years.

The possibility for this to turn out bad is pretty high. Even should the companies buy back their shares and the government get out completely from this setup… the precedent alone is incredibly dangerous. What will this mean for these corporations? How involved will the government get? Now that they are partial owners all previous barriers are gone.

It just gets worse by the day.

http://www.bloomberg.com/…

JPMorgan Chase & Co., the third- biggest U.S. bank by assets, agreed to acquire Washington Mutual Inc.’s deposits and branches for $1.9 billion after regulators seized the thrift in the biggest bank failure in U.S. history.

Customers withdrew $16.7 billion from WaMu accounts since Sept. 16, leaving the Seattle-based bank “unsound,” the Office of Thrift Supervision said today. WaMu’s branches will open tomorrow and customers will have full access to all their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on a conference call.

“JPMorgan is getting a steal compared with what they were going to pay,” said Scott Adams, a pension and investment analyst at the American Federation of State, County and Municipal Employees in Oakland, California, which owns WaMu shares. “It’s very tragic.”

WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week after firing CEO Kerry Killinger this month. The bank named Alan Fishman as his replacement on Sept. 8, agreeing to pay him a $7.5 million signing bonus and $1 million salary.

JPMorgan won’t acquire WaMu’s liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said.

The consolidation continues. Any bets on who’s next?