The Housing Chronicles Blog: Positive fall-out from the Bear Stearns rescue

Thursday, March 27, 2008

Positive fall-out from the Bear Stearns rescue

Economics is one of the most complicated social sciences one can study, and for good reason: besides the basics of supply and demand, the roles of human psychology and the inter-relations of a complex economy in today's world can be confusing. That's why I liked an article by David Weidner in today's on how the Bear Stearns bail-out may actually help save Main Street:

If you're thinking about refinancing your mortgage, getting a loan to buy a new car, or switching to a lower-interest rate credit card, you can thank the Federal Reserve for your ability to do so.

You might also want to mention that the recent boost to your 401(k) portfolio is appreciated as well.

Though it may not be obvious, anyone who participates in the credit world -- and that's most of us -- owes the Fed a debt of gratitude for stepping in and helping to prevent the collapse of Bear Stearns Cos...

Sure, the Fed is taking it on the chin. Taxpayers will buy a boatload of sketchy securities from Bear and hope that they produce any kind of return. J.P. Morgan Chase & Co. with the Fed's backing, will absorb the rest of Bear through a buyout. Taxpayers will probably take a loss, but no one knows how much it will be. It could be $29.9 billion. It could be half that, or nothing.

The move is unprecedented. The Fed on rare occasions has backed up banks, but it's never backed up investment banks. The idea that investment banks get bank protection is what should be debated, but no, everyone wants to know if the little guy is getting screwed...

Call it a bailout or call it corporate welfare, Timothy Geithner, the New York Federal Reserve president, had something else in mind when he forced Bear into the arms of its rival and took responsibility for $30 billion in its assets: the financial system.

"Main Street, directly or indirectly, by holding mutual funds, by having a pension in mutual funds or insurance invested in securities -- all of these are ways the person on the street has an interest in a stable financial system," said Lawrence J. White, a New York University professor who served on the Federal Home Loan Bank Board during the savings and loan crisis.
"The ability of an individual to get credit also" comes from Wall Street, White said...

It's those kinds of truths that get lost in the rhetoric in Congress or on the campaign trail. The latest to chime in, Republican John McCain, said on March 25 that he didn't favor government intervention either for "big banks or small borrowers."...

Sorry John, but an economic collapse wouldn't be limited to those who made bad bets or mistakes.

To his credit, Senator McCain did admit that economics are not his strong suit. Yes, John, we know! So what say Senators Clinton and Obama?

Obama has said he'd like to create incentives for lenders to refinance mortgages and he wants crack down on irresponsible lenders. Most of the candidate's policies are tougher standards for lenders not borrowers.

Sen. Hillary Clinton has proposed a $30 billion program to help troubled home borrowers. She also wants to get former Fed chairmen Paul Volcker and Alan Greenspan on the job. But she also offered an honest assessment of the Bear Stearns bailout...

Though she stopped short of endorsing the Fed's bailout of Bear Stearns, she's come the closest of any candidate to acknowledging that Wall Street and Main Street are just two names for the American credit highway...

So, if the Fed is backing up investment banks like it does commercial banks, then shouldn't investment banks be under tighter controls? Isn't this intervention the equivalent of creditor insurance for those complex loan agreements between Wall Street banks?

If so, then there are bigger questions at stake than whether or not some fat cats got bailed out. Wall Street has been living a life of freewheeling risk, built around the fact the industry was doing it on its own dime. Backed by taxpayers, brokers may be subject to capital requirements, managerial competency standards and restrictions on what kinds of business it can do.

In other words, they'd be just like regular banks.

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