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Beware the Bailout
Whether Bear Stearns was the victim of unfounded rumor or of genuine rot in its securities portfolio is unclear. But that very uncertainty defines the nature of the modern financial crisis—and the difficulties facing the Fed in trying to contain it. Financial institutions (banks, investment banks, hedge funds and others) are interconnected through networks of buying, selling, borrowing and lending. These require confidence that commitments made will be commitments honored. If that confidence collapses, the process of extending credit for the economy and of trading—for stocks, bonds, foreign exchange—may also collapse.
The Fed can no longer instill confidence by lending to besieged but sound banks. Somehow it must reassure the broader market that there are backup sources of credit and that the failure of any major financial institution won't trigger a chain reaction of failures, as firms refuse to deal with each other and dump stocks, bonds and other securities onto the market. That's why the Fed was eager to see Bear Stearns continue its operations by being purchased and why it has, in the past six months, introduced more and more ways for financial institutions to borrow from the Fed itself. It has gone beyond its traditional role of lending only to commercial banks.
So far, panic has been avoided, though some observers think the Fed's frantic efforts have actually contributed to the market's nervousness. Meanwhile, the real economy of production and jobs, though weakening, is not yet in dire straits. In February manufacturing output dropped 0.2 percent. Bad news, but hardly a calamity. But in trying to calm financial markets, the Fed has spewed out enormous amounts of money and credit that have depressed the dollar's exchange rate and could aggravate inflation. The effort to fix one problem may lead to others.
© 2008
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Member Comments
Posted By: thinkgra @ 04/13/2008 10:39:28 AM
Comment: The root of the subprime problem is two-fold: first, in an attempt to create an ever-expanding market, lenders relaxed their standards, allowing such things as no principal payment, no down payment, and no income documentation. (This is made possible by weakening of or violation of banking regulations.) Second, certain lenders took advantage of this, plus the FHA guarantees for low-income lenders to created a revolving door by which properties were endlessly recycled through a series of unqualified buyers, with the FHA repeatedly making good on the losses. (This is called criminal fraud, and is a felony.) These shaky mortgages were bundled into opaque investments, which made it impossible for investors, even those with the star MBA wattage of invesment house executives, to know just what they were buying. The sudden and mysterious (to the outsider) fire sale at Bear Stearns has the look of an insider takeover, facilitated with taxpayer funds. Having run out of little fish to eat, the sharks are now eating each other.
Posted By: Annceline @ 03/21/2008 9:17:55 PM
Comment: Finally, someone who believes as I do. I was once a union member, and was amazed to see how indiscrimately they wielded their power. The employer was unable to fire anyone, no matter what. That weakened the union from within. I proposed to anyone who would listen that there needed to be a middle ground wherein the union and the company would have to agree to hire a worker after a probationary period. That was 30 years ago, and for the past ten years I've been saying to anyone who would listen that the unions' time has come.....Bear Stearns is the catalyst.
Posted By: tassiedevil @ 03/19/2008 8:22:54 PM
Comment: Until Amercia stops printing money to solve its problems things will only get worse.It's time there was a real debate about the growning deficit.Law makers do not have the skills or guts to takle this problem head on.Just puting out the spot fires does nothing but make things worse.The last time this happens the answer was to come of the gold standard and to deregulate,turning back the colck and regulating evrything will only make matter worse.It's time middle America demanded more of it's politicans,the current 2 year elections cycle means there is very little chance of meaning full reform.you need to extend congressonial terms from 2 to 4 years,You need to ban lobbist from the capital and you need full disclourse right accross the board.What do I care I'm just an aussie,I care becasue everytime you sneeze we catch a cold.If America is going to be the worlds police fore then we should all contribute to the cost?Unitl you stop printing money to fund police actions nothing will change.I'm passing thru next month and it will be intresting to see what the man on the ground thinks.