Economics

Confidence Game

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Bear Stearns becomes the latest financial institution deemed by the government as too big to fail. It clearly won't be the last. From the Washington Post:

J.P. Morgan was unwilling to assume the risk of many of Bear Stearns's mortgage and other complicated assets, so the Federal Reserve agreed to take on the risk of about $30 billion worth of those investments. […]

Bear Stearns, in particular, was confronting a run on the bank as investors were too fearful of the future to make even overnight loans to the nation's fifth-largest investment firm. If it had been allowed to fail, senior officials believed, it would have created a cascading crisis of confidence that could well have brought down several other leading firms and dragged world markets with them.

Policymakers weighed that risk against the risk that their actions would create "moral hazard," or greater willingness of companies to take inappropriate chances.

Hard to believe that "moral hazard" is a serious concern, given that the Fed has now—for the first time in history—wrapped its security blanket around investment banks:

Since the central bank was created in 1913, it has served as a lender of last resort for ordinary banks, allowing them to post high-quality loans at a "discount window" in exchange for cash.

Last night, it announced a new provision that will in effect do the same for major investment firms. Starting today, and lasting for at least six months, this new operation will allow "primary dealers," which are 20 major Wall Street firms, access to cash in exchange for assets in which the market is not currently functioning.

Sure is a bad time to have your savings in dollars!

In November 2006, Brian Doherty asked a bunch of economist types: Can we bank on the Federal Reserve?

NEXT: Your Monday Morning Bummer

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  1. Well, at least we’re not federalizing the…

    Ah, shit.

  2. The moment everybody predicts the demise of the dollar is the time I sell my gold for dollars. Just like last month when I rearranged my investment portfolio, putting most of my money into housing stocks.

  3. You know, this is a really good idea. We should continue to federalize any failing company/industry. I mean, it worked for the USSR, right?

  4. But what if Bear Stearns failed, and nobody noticed.

  5. You don’t mean “federalizing,” you mean “nationalizing.”

    And nothing is being nationalized.

  6. Hang on, isn’t the Fed doing what Milton Friedman said it should’ve done during the Great Depression? That is, bail the banks out for the sake of consumer confidence?

  7. I used to think of Friedman as pro-free market. Then I started reading some of the works by the Austrian economists. Compared to most of them he is downright socialist.

  8. joe, I hate Mondays.

  9. Coffee good.

    Monday coffee, very good.

    Slurp

  10. So Bear Stearns fails, they liquidate their assets, stuff in the market becomes cheaper, people buy, and… nothing bad happens?

    What am I missing? (That’s a serious questions.)

  11. joe, I hate Mondays.

    Thanks for clearing that up, Garfield. Next up? Episiarch’s testimonial about the superiority of lasagna to other foodstuffs.

  12. I’d like to come up with a witty, Garfield-related rejoinder. But it’s Monday.

  13. Wait — Virginia Postrel said only crazy old anti-semites like Ron Paul worry about the actions of central bankers. Talking about monetary policy is kooky and not cosmopolitan, remember?

    Et tu, Matt Welch?

  14. And they got Bear Sterns for $2/share when it was selling for $30!

    It must be nice to be the favored son of Daddy Warbucks.

  15. Epi,

    Sorry. I did my taxes this weekend and I’m all worked up.

    Make the taxes due day and election day the same. One simple change that would hopefully solve a lot of problems.

  16. When the houses actually get cheap?

  17. When [b]do[/b] the houses actually get cheap?

  18. Would someone please get Ron Bailey on here to tell us why everything on board the U.S.S. Economy is just a-ok?

  19. Would someone please get Ron Bailey on here to tell us why everything on board the U.S.S. Economy is just a-ok?

    Word is he changed his mind on that.

    Here’s lookin’ at you, sage…

  20. Episiarch,

    It’s OK — nothing Garifeld-related can be witty, anyway.

  21. And the win goes to “Shirt.”

  22. Tax time. The most glorious time of the year. Just sent mine in and once again you suckers are subsidizing me and mine as I pay negative net income tax for the second year in a row!
    And once again, I’m living proof that our tax system is completely fucked up. Not that I’m complaining.
    (Yes, yes, add in FICA and I’m a net payer.)

  23. Episiarch,

    Nice one. Prving shirt wrong in one try. And Taktix. I guess the win goes to you, for now.

  24. And they got Bear Sterns for $2/share when it was selling for $30!

    Yeah, on Friday it was selling for that much, before it was known that no one was willing to lend them any money and they were going to crash and burn. They’d be lucky to get 30 cents a share today.

    So Bear Stearns fails, they liquidate their assets, stuff in the market becomes cheaper, people buy, and… nothing bad happens?

    Their creditors, creditors’ creditors, and so on would lose their shirts. I mean, it would probably sort itself out in a short time, but let’s not pretend it wouldn’t have majorly screwed up the markets in the meantime.

  25. I’d like to come up with a witty, Garfield-related rejoinder. But it’s Monday.

    Just drop-kick his butt off the table, Odie-style.

  26. Make the taxes due day and election day the same. One simple change that would hopefully solve a lot of problems.

    You need to make one other change – get rid of withholding, so on tax day you have to write a big check.

    Most people seem to believe that if they get a refund they think they haven’t paid any taxes, and the government is paying them, because they can’t quite process the fact that the refund is money that they already paid to the government that they shouldn’t have.

    If tax day and election day are the same day, and we still have withholding, Our Masters in Washington will get credit for all those refund checks, and have an incentive to make the tax system even more distorting and “progressive” than it already is.

  27. Just drop-kick his butt off the table, Odie-style.

    I really more a Nermal…

  28. Forget about hoarding gold.
    I’ve got a stash of WIN buttons I’m gonna put on eBay when the going really gets weird.

  29. Just drop-kick his butt off the table, Odie-style.

    Nice touch

  30. Most people seem to believe that if they get a refund they think they haven’t paid any taxes, and the government is paying them, because they can’t quite process the fact that the refund is money that they already paid to the government that they shouldn’t have.

    But remember, if you think mortgage companies can mislead people, you are teh elitist.

  31. Forget about hoarding gold.
    I’ve got a stash of WIN buttons I’m gonna put on eBay when the going really gets weird.

    LOL.

    As far as the shareholders are concerned, the difference between Bear Stearns failing completely or selling to JPM for $2/share is pretty academic. Maybe Bernanke could explain it to them.

  32. Graphite

    For 1000 shares the difference is $2000.

    Sure, it’s not the $30,000 that the same shares were worth Friday, but it’s still a significant amount for most people.

  33. But remember, if you think mortgage companies can mislead people, you are teh elitist.

    I wouldn’t deny that mortgage companies can mislead people, any more than I’d deny that car salesmen, penis pill hawkers, and Amway recruiters can. The fool and his money, etc.

    What I do deny is that there’s any way of codifying clear and concise laws against “misleading” buyers (but stopping short of fraud, which is already illegal) that will be both effective and unharmful to mutually-beneficial transactions.

  34. let’s not pretend it wouldn’t have majorly screwed up the markets in the meantime

    That’s a bad thing? Better to keep the fiction going that everything’s A-OK?

  35. Rhywun,

    It’s better than the alternative, but even the least bad option is still a bad thing. A lot of people would be suffering during the interim.

    And if you wonder whether the Herd can suffer for very long before they clamor for a fascist/socialist remedy, well, you shouldn’t *ahem* 9/11 *ahem*.

  36. Their creditors, creditors’ creditors, and so on would lose their shirts. I mean, it would probably sort itself out in a short time, but let’s not pretend it wouldn’t have majorly[sic] screwed up the markets in the meantime.

    No, we’d have completely normal markets in the meantime.

    Markets go down sometimes.
    Get used to it.
    That’s life.
    Bailouts just sweep the problem under the rug. I’d love to see someone pair Bush’s speeches circa 2002 about how everyone needs to own a home with his speeches circa now about… well fuck, I can’t even listen to guy anymore, but you get the point.

    His (unelected) FED put interest rates suicidally low.

    Guess what, Captain Asshat. Low interest rates mean people invest in other things than savings, because they aren’t earning any fucking interest.

    Is it really that much of a surprise that banks have no money to lend now?

  37. Uh, “majorly” is a widely used word in informal settings, so chill on the [sic]s.

  38. A lot of people would be suffering during the interim.

    A lot more people are going to suffer when this blows up in the (next) administration’s face.

  39. A lot more people are going to suffer when this blows up in the (next) administration’s face.

    And said blowing up may be the objective. If the GOP thinks they are going to lose the presidency, they need to shove any serious pain off on the Dem president.

  40. And said blowing up may be the objective.

    I wasn’t going to venture that far into conspiracy… but hey, I wouldn’t put it past ’em.

  41. I agree, Rhywun. In a perfect world the Fed would allow troubled investment houses to fold and deal with the consequences, so as to keep the system healthy long-term.

    But in the real world it’s delusional to think there wouldn’t be any short-term consequences if the Fed did this, and that voters won’t cast some awfully rash votes while homes and jobs are being lost.

  42. On the plus side, I should be able to repay my law school loans with beer money.

  43. Box ’em up and send ’em to Abu Dhabi?

  44. But remember, if you think mortgage companies can mislead people, you are teh elitist.

    No joe, I’m an elitest because so many dumbass Americans are so easily misled, often by themselves. As an elitest, I’m not required to “feel their pain”. In a nutshell, they’re stupid, it’s not my fault.
    See the difference?

  45. Yes, I see the difference. You feign outrage when people are mislead by the government, and don’t bother when they’re mislead by someone seeking personal profit.

    clear as day.

  46. joe,

    The govt has a legal duty to the people. Someone seeking personal profit does not.

    So, damned right I have a different standard for govt and private actors.

  47. Chris Potter, I salute you.

    You explain the obvious with far less profanity than I.

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