General Motors used to be among the giant companies widely considered “too big to fail.”
Almost all of Wall Street said a GM bankruptcy was “unthinkable.” Most Americans didn’t even consider it as a real possibility. And as recently as February, outgoing and incoming administration officials were still insisting they would never let it happen.
But three and a half years ago, in our October 11, 2005 edition, “GM Headed for Bankruptcy,” I warned you that “too big to fail” was a myth … that the myth would be shattered … and that the final day of reckoning for General Motors would be in federal bankruptcy court.
Now, that day is here.
General Motors, once the world’s largest company, will be in a New York bankruptcy court, filing for Chapter 11 later today, and it’s high time to declare that …
“Too Big to Fail” Has Failed
Plus, it’s high time for all Americans to confront a new, more sober reality: The government is not nearly as powerful as advertised.
Case in point: If you’re among those who thought Fed Chairman Ben Bernanke had the power to end this debt crisis, think again.
Despite the most massive bond buying spree in the Fed’s 95-year history, Bernanke has failed to stem an avalanche of selling by bond investors … failed to stop bond prices from plunging … and failed to roll back a rising tide of long-term interest rates.
How is this possible?
For a quick review of the events, just rewind the clock to the Fed’s March 18 press release, when Bernanke launched his newest, high wire act with great fanfare and bravado.
At that time, despite $700 billion on TARP funds authorized by Congress, the U.S. Treasury Department was making virtually no headway in unfreezing credit markets. The world’s largest lenders were still in gridlock. Most forms of credit were still unavailable to even the most worthy borrowers. The credit-addicted global economy, suddenly deprived of its regular debt fix, was in convulsions, collapsing uncontrollably.
So, in a desperate attempt to jump-start the credit markets, Bernanke dared go where no other Fed Chairman had gone before.
He dropped short-term rates to zero.
He committed to buying $300 billion in long term Treasury securities plus another $100 billion in government agency securities.
He even promised to buy up to another $750 billion of mortgage-backed securities.
Total new commitments in that one announcement alone: $1.15 trillion.
But by going so far out on a limb so fast, it was impossible for the Fed Chairman to estimate what the impact might be. There was no historical precedent.
