Das Kapital

In light of the recent Madoff expose, I think we need to meditate a bit on why hedge funds and large pools of unregulated capital exist in the US in the first place.

First, let us consider the present situation:

If Bernanke wanted to close spreads on AAA CMBX, he could go out and buy a hojillion dollars worth of AAA CMBX, consuming massive amount of either Treasury capital or far, far more dear(to those that matter) Fed capital.

Or...

Bernanke could allow a risk-averse atmosphere environment to persist over the capital markets, leaving these eager Kapitalists bereft of safe returns for their hapless investors. Bernanke, of course, obliges das Kapitalists: he transmits the intention to buy up AAA CMBX by the truckload. Let us turn back to Sun Tzu:

"Do not thwart an enemy retreating home. If you surround the enemy, leave an outlet; do not press an enemy that is cornered. These are the principles of warfare."

Bernanke is now providing an outlet for private capital: surrounded on all fronts by baleful economic prospects, there is little hope for returns of capital, let alone returns on capital. However, instead of letting capital sharpen its spears and form an impenetrable, deflationary phalanx, Bernanke gives capital an outlet.

Anvil, meet hammer, and be gentle to the skittish private capital in between.

edit:

I omitted foreign central bank capital: clearly foreign CB's are pouring money into a t-bill hole, which the Fed exploits to finance various activities. Will foreign CB fear soon turn to greed? Will foreign CB's be coaxed into buying agencies??? It is posssible...