Federal Reserve Chairman Ben Bernanke speaks at the National Community Reinvestment Coalition annual conference, Friday, March 14, 2008, in Washington. (AP Photo/Pablo Martinez Monsivais)
by Frank James
The news that JP Morgan Chase has agreed to buy the troubled investment banker Bear Stearns at the ridiculously low price of $2 a share, less than a tenth of what Wall Street valued that stock as recently as Friday, is truly mind-blowing.
It's clearly a deal that would not have happened if the Federal Reserve and its chairman, Ben Bernanke, who seems to have a firefighter's instincts, hadn't stepped in to guarantee that if Bear's assets decline, which is likely, that the central bank (i.e. U.S. taxpayers) will take the hit and not JP Morgan.
Sunday was no day of rest for the Federal Reserve as it worked overtime to keep the financial markets and U.S. economy from going over the cliff because of the mortgage mess and the resulting credit crunch.
Besides making as much as $30 billion in financing available to make the JP Morgan-Bear Stearns deal happen, it also lowered its discount rate which is the interest rate it charges to banks for overnight loans.
And in a move meant to shore up other investment banks that could otherwise find themselves with cash shortages like Bear's, the Fed opened its so-called "discount window" to investment banks so that they could take out short-term loans, just like commercial banks.
If all this was meant to boost investor confidence, it didn't seem to have that effect initially.
The world's financial markets opened sharply lower as the Fed's dramatic moves just made many people fret about what other shoes would drop and when.
We can expect continued talk in Washington, especially on Capitol Hill, about the federal government creating a moral hazard by its actions, the notion that if the government bails out Wall Street for its bone-headed financial moves, that lessens the penalty for such risk-taking behavior, increasing the likelihood that it will happen again.
But the Fed clearly believes the moral hazard concern is the lesser of two evils right now, with the greater evil being a further meltdown of the financial markets.
Still, what's that great line by John Kenneth Galbraith about socialism and the U.S.? Oh yes, "In the United States, the only acceptable form of socialism is socialism for the rich." Hard to argue that the late economist wasn't on to something after what we've just witnessed.
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Comments
Should the Fed bail out the Financial system?
http://www.youpolls.com/details.asp?pid=1887
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Posted by: DBlaked | March 17, 2008 10:07 AM
This, of course, is the essence of Republic party ethics: Privatize the profits; socialize the losses.
Just for once, I'd like to see one of our regular wingnuts justify this as 'capitalism'.
That great Objectivist, Alan Greenspan did nothing to regulate this problem back when he could have and now Bernanke is left with nothing but unpalatable choices. The only real question is whether we'll have a severe recession or a full blown depression.
Posted by: weinerdog43 | March 17, 2008 10:24 AM
maybe Bernanke and the fed should just sit down and let this economic cycle play out unmolested. That way, our naturally strong economy can rebuild naturally and we'll be on our way sooner and more securely.
Posted by: Steve S | March 17, 2008 10:50 AM
Where are all the wingnuts that scream about socialism? This is socialist banking, yes?
I'm going to keep putting this up till folks realize how business is being done. We live in a world of smoke and mirrors and we keep buying into it.
http://www.crooksandliars.com/2008/03/15/elliots-mess-spitzer-investigation-tied-to-fed-bail-out/
Posted by: DD | March 17, 2008 11:33 AM
"SAUDI ARABIA SPEAKS"
YOUR MOVE BERNZY!
OOOOOOOOOOOOHLLLALA!
CHECKMATE!
WE TAKE IT IN 2.00 PACKAGES AND SELL BACK TO YOU AT 57.00 NEXT WEEK TO START.
BY THE WAY, YOU KNOW WE OWN ALL OF IT, ALL OF AMERICAN INVESTMENTS.
NO DUBAI, WE GO SHOPPING IN LATE NIGHT "ONE DOLLAR" STORE!
WE LOVE YOU LONG TIME, YOU MUST COME "SAND BOWLING" SOON.
Posted by: Roger Morris | March 17, 2008 11:42 AM
Dear whoever makes the decision to bail out investment firms:
I, like millions of other Americans, am facing financial collapse. Could you drop off some $ to bail me out ? Also, I have no medical insurance. Could you provide me some or would this be considered socialsm ? Please explain to me the difference between bailing out businesses which make bad decisions and little old me struggling each day.
Posted by: Sweet Sue | March 17, 2008 11:52 AM
Corporation Welfare. Jessie Jackson coined the phrase back in 1984 when he ran for president; he by the way, also spoke of our industry and factories going overseas; but, Jessie is Black, and the majority of people in this country don't feel a black person can contribute to their own country unless it is running a football; and, when they tell you God is slowly destroying you and your Empire, you are not believing that either. It's secular, Humanism, Corporate Jesus Christ, and technology and it's the European way or the Highway. Ha ha. What you going to say when the Pacific and Atlantic Ocean pours it's entire contents on the continent of Americas. Oh, another joke huh. I'll be laughing with you, Pal how inexplicable and surreal it will be when that time is upon us and this greate Empire Falls by the Forces of the Universe. Author M.
Posted by: American First | March 17, 2008 12:51 PM
What the hate America Left will not accept is the fact that fuel prices have gone down dramatically since President Bush took over. These are facts the Lefty Loons will never recognize.
Posted by: james patterson | March 17, 2008 12:54 PM
"Dear whoever makes the decision to bail out investment firms:
I, like millions of other Americans, am facing financial collapse. Could you drop off some $ to bail me out ? Also, I have no medical insurance. Could you provide me some or would this be considered socialsm ? Please explain to me the difference between bailing out businesses which make bad decisions and little old me struggling each day."
Socialism is when the government helps a person who has serious problems through no fault of his own. Capitalism is when the government bails out a business run into the ground by bad management.
Posted by: Harvey Wallbanger | March 17, 2008 1:09 PM
Harvey??? You bang walls? thats a little strange and demented.
Posted by: silly boy | March 17, 2008 2:11 PM
Good snark(I hope), JP.
Posted by: Jones Hussein | March 17, 2008 9:27 PM