The Bear Stearns collapse

I'll agree, this is a bigger deal than Obama's preacher, but I'll leave you with this thought from a businessman friend of mine when we discussed this today: Bear Stearns should be allowed to fail (i.e.: no federal government bailout), if we live in a truly free-market capitalist economy. That failure shouldn't bring down the whole economic system. If it does bring down the whole economic system, that means our problems are much bigger than we've been led to believe, and a federal government bailout only postpones the inevitable terrible reckoning.

Well, on that happy thought, off to bed!

This news also lead me to think about the limits of our free market capitalist system. The problem with just letting a bank this large simply fail is that it will be everyday people who pay the price. I do think that the problems in the system are more profound than most people realize and it could be that breach in the wall which triggers even greater damage. However, I think that at this point we may need to take a step back from our ideals of a free market system which self-corrects and should be allowed to rise and fall without interference to think a little harder about it. Is devotion to this ideal worth the devastation allowing a bank this large to fail would bring into innocent people's lives. I wonder if we haven't pushed to the limits of the creative destruction/growth dynamic which underlies our capitalist system.

Not that we should reject free markets and capitalism, but that we should recognize that every system, even one as productive and good as capitalism has limits. If we can acknowledge this, then maybe we'll do a better job of pulling back from those limits before the system begins to eat itself.

On the flip side, I don't think that we're so far gone that we can't begin to fix some of the problems which this whole fiasco has created. I don't think a complete collapse is inevitable. What worries me the most about all of this is that our lawmakers seem to have very little interest in doing things which will benefit the common good. They want us to settle for them appearing to do things without actually having to make needed changes, particularly changes which lobbying groups oppose. This is particularly problematic because the same lobbying interests which our lawmakers seem to be taking their cues from often represent economic sectors and industries who are responsible for the mess we're in now.

My biggest hope to salvage this thing now is that the federal reserve and regulatory groups will probably stretch their powers to the outermost limits to work to stave this thing off. Of course the problem with that is that while these agencies may represent our best hope for a reasonably successful emergency landing, they are not accountable to the people at all. I think they are our best hope right now, but it's not to hard to envision ways that this could set bad precident. If these agencies succeed, will we also accept the reality that our elected branches of office are now so much show and decide to just live with that? At that point, it seems like we could veer off into the sort of government run by experts and philosophers that Plato envisioned while the elected government serves as a sop to give the people the illusion of control.

Just some ramblings from in my head.

rebeccat: It should be possible to let a bank fall, and yet provide some sort of state bail-out for the "widows and orphans" involved, without extending this to corporate investors. I don't know how much you heard about this in the USA, but a major UK bank, Northern Rock, recently collapsed - the first one for more than 100 years - there was a run on the bank, with savers queueing in the street, like something out of a Victorian novel. After dithering, the govt bailed the bank out, failed to get a buyer, and has now had to effectively nationalise it. Some estimates suggest that every person in the UK will end up paying 1,000 pounds ($2,000) in tax because of this fiasco. It really is incredible that people who make vast sums gambling can get the taxpayer to clean up after them when things go wrong.

Oh, I meant Babyboomers retiring, getting Social Security, and on Medicare.

The assumptions behind the free market working well include honesty and transparency. There has been a lot of both of these missing in the subprime crunch. Why is this? I dont really know, but that wont stop me from offering my opinion.

Republicans believe (mostly correctly) that the markets will work better w/o any regulations. They work towards removing regulations and provide a friendly environment for business. In this friendly environment business has carte blanche to behave any way it wants (a litttle hyperbole but what the heck). If business is honest and transparent, it works, and things do get better economically for a while. If it isnt, we get Enrons and subprime issues. When business is really dishonst, such as the Enron folks, they contribute lots of money and stack legislatures with friends so that they can pass enabling legislation.

Democrats believe (mostly incorrectly) that business can be regulated to provide positive economic and social goals. This can lead to things like price controls, high tax rates, tariffs and a slow strangulation of the economy. Some of the social goods may be achieved but at a cost.

The issue I see is that there are two kinds of regulations, one good and one bad. Bad regulations try to force business to achieve social goods and businesses aren't especially good at that. Those things may be done by individuals or government (if you are inclined that way). Good regulations and regulatory agencies act to police business. Even a casual study of history shows us that people will eventually cheat. Sinful nature anyone? People are incredibly good at hiding their cheating as has been show again with this subprime crunch. Republicans want to throw out both kinds of these regulations and we get chaos occasionally. Democrats want to use both kinds of regulations and we risk stagnation. This is one reason as I have gotten older I think that it may be important to just vote out the party in power every now and then to readjust the balance.

I dont know the outcome here but if you are truly terrified it's probably time to start investing again. I dont think Bear Stearns should be bailed out. Its primarily an investment bank so I dont think it will directly affect many everyday people. The working class will feel it in the ongoing credit crunch and the inflation.

Final thought. The hedge funds are sitting out there and they are basically unregulated. They have little transparency. We worry about the sovereign wealth funds with their motives but hedge funds control more money and Im not sure their motives are any better. The guys running these only pay 15% in taxes too.

Steve

MI (and Rebeccat) the Fed is a collective bargaining assocation for the financial services sector of our economy, accountable to its member banks NOT the public. While the GOP slams communitarian practices like working class collective bargaining, its slow to critique the same communitarian practices of the elites, on what political philosophical grounds? Free markets. Can national interests limit free markets?

Question to the room: Do the subsidiary meetings of the regional Fed banks pledge allegiance to the flag or perhaps even deign to pray, as the elected branches of our Government do all over the nation? Do they indeed have a patriotic duty or merely a fiscal duty? If fiscal duty only, what is their power to defend the value of the Nation's currency?

Do the regulatory agencies that are under public control have a metric for discerning when the value of dollar deposits of their constituents (the citizen voter, not the taxpayer) have been diluted by leveraged financing? Funds from Northern Rock depositors were less than 10% of the mortgage pool being floated on the global market - it seems to me like a number a borrower ought know before they commit? Otherwise you could just go shopping overseas, no? Like at one of those wealthy off-shore tax havens Mr Lewis, the majority Bears Stearns shareholder, favors?

Joshua's recent post links to POVs on our currency (from and intriguing vantage point, a Catholic working in Korea):
http://orientem.blogspot.com/2008/03/gold.html

For the lit-chicks, here's the Shakespeare angle
(forgive the pun!
Don't get it?
You'll need to read on to see whether GW passes for an Angel...)

209.85.165.104/search?q=cache:Tn3vE0rRX4kJ:wmshakespeare.com/Pictureinlittle.doc

" Since 2001 the dollar has been devalued by 60%... yet no one seems to care.

Is Ron Paul the only one to connect the dots... five years and counting in Iraq (and no end in sight in Afghanistan) was paid for with "funny money" using our piggy banks as the collateral... now the repo-man's coming calling...

"... five years and counting in Iraq..."
yes... what's now being called the 3 Trillion Dollar War...
there's no doubt that the economy has been dragged down greatly by these huge war costs...
kinda like how the Vietnam War, which the USA fought at a cost of nearly $1 trillion adjusted to today's dollar value, was followed by a weak economy in the 1970s...
but... history doesn't repeat itself... does it?

this economic trouble just reinforces the magnitude of the depth of the lack of wisdom that was contained in Bush's horrible disastrous decision to go to war...
the label of worst-president-ever is well deserved... though...
even as this decision may collapse the economy...
we do have to forgive him... yes?

prosperity faith hope love joy peace to all...
Impeach God...

Banks are collapsing, here and in the UK, because they decided a play a reverse lottery. (A reverse lottery, for people who don't know that term, is when you have near-assured tiny gains, with a tiny risk of catastrophic failure. Like the lottery, but swapping winning and losing.)

The banks basically started a 'risk distribution' scheme that ensured everyone was holding a piece, so they'd all go down together, and required housing prices to keep going up. As those prices were absurdly artificially inflated, the highest relative to earnings in the entire history of mankind, this behavior was extremely stupid, or it would have if the executives doing it had actually been attempting to run their businesses instead of making as much money they could and sprint out the door.

A sane government would have clamped down on house prices at the start of all this, making the collapse not happen, or at least a good deal softer. Sadly, we were stuck with people who wanted the economy to look good, and it looked like crap, so they faked it with house prices.

A good deal of economic growth over the last 6 years was fictional. Artificially inflating houses prices is not 'growth'. It certainly helped cover up the decrease in production, though, and the fact that wages were not increasing. And, with loans for everyone, people weren't even homeless! It all worked perfectly, our magical fairy economy where no one can afford houses because they aren't making any money, but they still have a house because of pixie dust mortgages, so no one's on the street.

And occasionally, banks will ask themselves 'Why did we lead to a bunch of people with no money whose only asset, their house, has decreased in value to less than the amount of the loan?', aka, look downward, and plummet straight down, Wile E Coyote style.

Rod, KUDOS for raising an important, worthwhile issue!

Kevin Phillips notes that the downturn for the last three world powers (Dutch, Spanish, British) coincided with a major rise in speculation by the very wealthy. Now we're seeing what specualtive exuberence has wrought on the stock market and the housing market and the damage is spreading to main street via financial markets.

Watching this over the past few years has led me to make up this rule: Great wealth is fine. Many people being wealthy is fine. But too many people having too much wealth is not healthy for a nation's economy.

And remember that Bear Stearns is not a commercial bank. Instead, it fell into the class of investment that was to risky to fall under normal banking regulation. Maybe that was not a good idea?

Look, I'm no economist, but if there's one place that ideological conservatives seem to have erred it's in maintaining that a market with no meaningful regulation is self-correcting and that government should stay out (except to provide the legal basis for commerce and finance, of course).

Anyway, I think that too many having too much to speculate with requires someone to watch out for the many who suffer serious life changing hurt while those who speculated -- well, they're not going to be homeless anytime soon, are they?

Rod,

I wish that you would talk more about the economic problems that the entire world is facing due to the real estate bubble that our very own Alan Greenspan caused.
There is some great info at "Dr. Housing Bubble," and also "Patrick's bubble blog."

At this time, the FED is bailing out Wall St. by lowering interest rates(causing inflation and a dollar devaluation).
In addition, our government is taking on bad Wall St. mortgage paper, both by the FED directly, as well as shoving some of the toxic loans onto Fannie Mae and Freddie Mac, which means that taxpayers will be paying for the mess in the end.

If you really look into this, it will make your blood boil! This is the single BIGGEST story that is not getting the coverage it deserves.