I sucked NPR into my head during my last moments of sleep today and had a weird dream about Bear Stearns crashing--except, in my dream, there was a bear. The roaring, mauling kind.
And on waking up and hearing the whole story, I find that I agree with Paul Krugman's op-ed in today's Times: let it correct--let it go. Let Bear Stears deal with the consequences. (It also makes me vaguely insane to listen to the "free market! regulation is repression!" mantra turn into government-funded bailouts. I thought you didn't want the government all up in your business!)
Monday, March 17, 2008
Safety Nets for Corporations
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5 comments:
Krugman says we shouldn't just let the chips fall where they will and I agree with him. It's not much of a bailout per se for Bear Stearns but an orderly liquidation. JP Morgan maybe will gain from this on the other hand. The Fed engineered takeover of Countrywide by Bank of America though isn't looking too good for BAC at this point. More regulation of the right type is needed. Things went way too far in the deregulation direction but letting Bear Stearns just collapse would collapse further financial institutions that can survive if the Fed plays its original role it was set up for of lender of last resort.
Excellent post. I get so frustrated reading PF blogs and so many seem to be self-righteous and laissez-faire, it's good to read something like-minded by a fellow English major!
it is an interesting problem. I'm just glad I don't own any stock in BSC.
The stockholders of Bear Stearns are hardly celebrating over their gains from this alleged bailout. Bear was purchased by JP Morgan for about $2 a share, meaning stockholders lost nearly 99% of the value of their stock in just sixteen days. Most of the bankers at Bear Stearns will lose their jobs, when all is said and done. The criticism of the Fed here is misguided (and Krugman is not joining it); similar criticism was made when it arranged for the orderly liquidation of Long Term Capital Management back in '98 even though it didn't use a penny of taxpayer money. (The bondholders of Bear do come out all right, though.)
The free market argument for letting Bear Stearns fail is that, by bailing them out (to the extent that they are), the Fed is creating a real moral hazard. (Similar risks will be taken in the future, leading to more bailouts.) This is probably true, but I'm not entirely convinced that many future investors will say, "Bear Stearns managed to get a penny on the dollar for their stock, instead of zero, so we can take the same big risks they did."
I see both sides of the issue but I definitely don't understand it well. I do agree with you that the arguments for little (or big) government should be somewhat consistent. In other words, it rubs me the wrong way when conservatives turn a blind eye at "corporate welfare".
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