George Will has a great idea(!) about bank bailouts
by Chris 6 comments Leave a comment June 9th, 2008
We may or may not be in the early stages of a horrible recession. All we really know is that gas is f***ing expensive and banks seem to be falling all around us. But I tell you what, I’ll be damned if bad economic forecasts stop me from eating chocolate and chugging beer.
Anyways, back to that bank bailout thing. Our economic overlords at the Fed and in the Federal government seem intent on shielding massive bank institutions from the consequences of their own stupidity and shady business practices. This essentially means giving these banks our money in the hopes that it will protect the foundation of the economy. Remember Bear Stearns.
But as the Onion wisely said, “Giving money to institutions that failed at their only job, which was to have money, may not be the best strategy.”
If we are going to give them money, why aren’t we exacting any concessions? Conservative George Will has a couple great points on this score:
The Fed has no mandate to be the dealmaker for Wall Street socialism. The Fed’s mission is to preserve the currency as a store of value by preventing inflation. Its duty is not to avoid a recession at all costs; the way to get a big recession is to engage in frenzied improvisations because a small recession, a.k.a. a correction, is deemed intolerable. The Fed should not try to produce this or that rate of economic growth or unemployment.
Here’s the best part:
Congress could pass a law saying: No company benefiting from a substantial federal subvention (which would now include Morgan) may pay any executive more than the highest pay of a federal civil servant ($124,010). That would dampen Wall Street’s enthusiasm for measures that socialize losses while keeping profits private.
In other words, if we’re going to have save your asses, you’re not gonna get stupid rich anyways.
What annoys me the most about this administration (not necessarily the Fed) is the bailout of banks but the refusal to assist individuals trapped in ARM’s. There had to be government action on Bear Stearns as it was causing a reverse bank run. Margin calls escalated and banks were pulling loans from businesses and governement entities in fear of default. Subsequently, this has effected indivuduals in the credit market. The Fed’s assistance to bail Bear was unprecidented but prevented a crash in the market. I agree corporate heads are overpaid but think the banks will only be prevented from excercissing their greed by further regulation and oversight. And incentives such as the open window and overnight rates.
Sheepywoman,
I want to preface this by saying that I’m pretty sure you know more about this situation than me… but I have to question the idea that Bear Stearns was too important to our economy to fail. Now maybe it’s true, but I don’t think it’s especially clear from anything I’ve read.
I only ask that question because I think letting market forces work their magic is just as important as restoring and increasing regulation of financial institutions.
… and thanks for commenting…
The purpose of bailing out Bear Stearns was to try and calm investors from panicking and causing other banks with similarly poor business strategies to go under. I think they feared a domino effect that could have terrible implications for the economy. I don’t know if its true or not and it could’ve been an irrational fear. We won’t ever really know though since letting Bear die is only a hypothetical. JP Morgan was just in the right place at the right time.
Now, what is more pressing is that Congress ensure that something like Bear Stearns never happens again.
Sounds like all three of us are in agreement on that point.
Agreed, but to answer your uncertainties Ian, it did cause a domino effect. As an investment bank, many other banks on the street had assets invested in Bear Stearns and they were pulling out their funds within a couple days. Banks escalated this fear of default by raising margin requirements, or a higher percentage of cash required per their outstanding loans. So overnight, firms owed the bank a couple million and if they did not meet their call, the banks started selling assets. Carlyle Inv. was a causualty of not meeting their margin call. This effected individuals b/c credit card companies undewrite their loans and sell them on the secondary market but there were no buyers. So interest rates went up. Bear Stearns was very poorly managed and highly leveraged. They had something close to $32 debit to $1 assets. Their stock was overpriced and they were destained to fall. It is a reflection of management and investors that the stock value was so high given the risk the firm was undertaking.
Well there ya go. Very informative Sheepywoman.