In a desperate effort to keep the collapsing housing bubble from sinking the economy, or at least the country’s leading financial institutions, Federal Reserve Board chairman Ben Bernanke has broadened access to the Fed’s discount window beyond the commercial banks who it directly regulates. Bernanke has decided to allow 20 major securities dealers to also take advantage of this special low-rate government loan program.

It remains to be seen how much good this will do for the economy, but with the Fed desperately trying to make up for its failure to contain the housing bubble, anything is probably worth a try. Even if this new lending route turns out not to help the economy much, it is certainly a good deal for these financial firms. They can now borrow tens of billions of dollars from the government at just a 2.5 percent interest rate.

Why shouldn’t the taxpayers get something in return?

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The news that J.P. Morgan bought investment house giant Bear Stearns for just $236 million, or $2 a share, sent tremors through financial markets around the world today. This is company whose stock was worth almost one hundred times as much a year ago. Its building alone is valued at close to $1 billion, which suggests that all the other assets of this 85 year-old investment bank had a negative value – Bear Stearns liabilities exceed its assets.

Further confirming this view is the fact that the Fed apparently had to make guarantees to J.P. Morgan of $30 billion in order to get the bank to take Bear Stearns even at this price. That suggests the bank had a lot of real garbage on its books. The markets are right to be worried. Of course with the $8 trillion housing bubble in full meltdown, there will undoubtedly be much more bad news for the banks in the months ahead.

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