Bear Stearns, Goldman Sachs Falter as Subprime Mortgage Crisis Bites

Are rising asset prices really a sign of economic health? Not in Zimbabwe. That godforsaken nation has the fastest rising stock market on earth, but its economy is a basket case. The only thing you can do there is speculate in stocks. Who wants to build a factory in Zimbabwe? Who wants to invest in an oil refinery? Who even wants to plant trees? No one. So everyone buys stocks.

In America, up until the 1970s…or 1980s…the economy was pretty healthy. Stock prices reflected, in a rough way, corporate earnings. Art, property, collectibles and other assets rose, more or less, along with the economy itself. For every dollar in goods and services Americans bought from foreigners, they sold about another dollar’s worth to them.

But what is happening now? The Dow remains near an all-time high. It rose again yesterday. Other asset markets are going wild. Is this because the underlying economy is so strong? Or is it because there is just so much money around with nowhere else to go?

Is the US economy more like the Chinese economy…or more like the Zimbabwean model?

In the West, even the fleetest industry seems to be running out of energy. Bear Stearns (NYSE:BSC) and Goldman (NYSE:GS) announced disappointing results – thanks to their exposure to subprime mortgages.

Bear said its profits were off 10%. Goldman showed rising profits, but investors sold off the stock anyway; they expected more. Freddie Mac (NYSE:FRE) announced a US$211 million loss for the first quarter.

The financial industry depends, first and foremost, on cheap and easy credit. Yet, the long bond is pushing mortgage rates up. Switzerland, a source of ultra-cheap money for many years, raised rates to a six-year high. The European Central Bank, too, made the front page of the IHT by hiking its key lending rates.

What to make of it? We don’t know, but right now, rising interest rates are like a javelin – aimed right at the biggest bubble the planet has ever seen.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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