The American Spectator

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Unbearable

3.19.08 @ 12:01AM

BAILED OUT
Re: Philip Klein's The Fed Panics:

Hey, how bout cutting oil, cigarette, social security, etc., taxes AND gov't spending in honor of the New Forgotten Man?
-- Scott Horn
Akron, Ohio

I sympathize with the theme of Philip Klein's article, but the alternatives might be even worse. Britain just had a run on a mortgage bank called Northern Rock -- now usually referred to as Northern Wreck. The Bank of England had an opportunity to provide temporary loans to keep the bank going while it was taken over by a competitor - exactly the same as the Federal Reserve has done with Bear Stearns. Unlike the Federal Reserve the Bank of England baulked at the idea, for the same reasons as Phillip Klein outlines. Northern Rock's financial position became impossible, depositors were lining up for blocks to withdraw their funds, the British Government provided loan guarantees to persuade them to keep their accounts open and the Government ended up provided far more in loans than the original buyout would have required. The Government dithered appallingly and allowed the mess to drag on for six months until it took the only possible action left and nationalized the bank (after committing around $100 billion in loans and guarantees to keep it afloat). Now the Government owns a bank that is probably ruined for ever and has to try and sell it in a market that is far worse and will probably decline even further.

Unlike the Bank of England and the British government, the Federal Reserve acted with remarkable speed to get a possible financial catastrophe off their hands and into the arms of a firm that could manage it better. Comparing Bear Stearns and Northern Rock makes the Federal Reserve look a lot better than it might otherwise. The Bank of England and the British government look hopelessly incompetent compared to the Federal Reserve. The Bear Stearns business still leaves a lot to be desired, but it could have been far, far worse. If you have to choose two evils, it is always better to choose the lesser one and that is what the Federal Reserve did.
-- Christopher Holland
Australia

Once again, The Bush Administration rushes blindly into the private sector. Ever since "W" ran as a "compassionate conservative," he and his administration have bent, twisted or mutilated the meaning of conservatism. In the book of Matthew, we are clearly told, "Ye shall know them [trees] by their fruits. Do men gather grapes of thorns, or figs of thistles?" Do true conservatives create the largest government bureaucracies known outside of Communist ruled countries? Do conservatives add multibillion dollar Medicare prescription programs to already existing government handout programs? Do even the most compassionate conservatives seek to interfere in essential family affairs (i.e., Terri Schiavo)? RiNOs yes, but not true conservatives.

Philip Klein is correct that the Fed helped bring on this crisis with its quick fix slash and burn programs. The Fed is not nearly as smart and responsive as the "invisible hand" of the public. The real estate markets were not suffering some imagined "irrational exuberance," but were deeply under the influence of people keeping their eyes on the short term rates and gains and not the long term realities. While it is highly unlikely that the American tax payer will get stuck with the bill for Bear Stearns, the possibility of being stuck was never existed until the Fed stepped in and offered our money as collateral. Let those who sought to profit be also the very ones who pay for the risks. This government backed buy out, a graceless form of corporate welfare, sets a loathsome precedent and opens the GOP to class warfare attacks, as noted by Mr. Klein.

Many people bet low interest rates would last a lifetime. They were wrong. Bailing them out, while a feel good move in the short term, is destructive and immoral in the long term. If people are unwilling to invest their own capital, then they are best off investing not at all. But if the government removes the risk, it is removing reason and caution. It is allowing the public to play Russian roulette with someone else's head pressed to the muzzle.

Chairman Ben Bernanke would be well served by hanging a plaque with the words of the brilliant warrior and U.S. General, G.S. Patton, "Take calculated risks. That is quite different from being rash."
-- Ira M. Kessel
Rochester, New York

I think Mr. Klein is hyper-ventilating. Is there a practical difference between bankruptcy and selling for $2 per share? If this is a bailout, it is very niggardly as U. S. bailouts go.
-- Ty Knoy
Ann Arbor, Michigan

I agree that there is a growing tendency in this country not to hold individuals responsible for their actions. However, this state of affairs is primarily the result of the excessive litigiousness of a population teeming with accommodating lawyers, and blame should not be laid on highly competent public officials such as Ben Bernanke, who is just doing his job. Mr. Bernanke's actions are about as far from panic as you can get: he is simply attempting to stabilize a financial system that is teetering out of control.

If the purchase of Bear Stearns by JPMorgan Chase is completed as planned, the latter will get a bargain, but the shareholders of Bear Stearns, including employees who own thirty percent of the stock, will be out billions of dollars. Describing this event as a bailout is not accurate. It could be argued that the actions of the Federal Reserve Board are preventing a collapse of our financial system that could ultimately cost the public trillions of dollars and cause a depression.

Mr. Klein's comments are more applicable to Alan Greenspan than to Mr. Bernanke. While it is not the responsibility of the Fed to create regulations that prevent these disasters, it is its duty to make suggestions to Congress when dark clouds are gathering on the horizon. Mr. Greenspan's cavalier laissez-faire attitude practically ignored the development of the dot-com and housing bubbles and the current credit crunch. To the extent that these outcomes are predictable, the Fed should be raising flags. In the case of any bubble, that could take the form of stern warnings of the consequences to frenzied speculators and ignorant consumers. Clearly, in hindsight, some new regulations concerning mortgage lending practices would have been beneficial. An economic case can be made for the lowering of the federal funds rate to one percent in July, 2003, but I suspect that interest rates were kept too low for too long without much thought of the ensuing market excesses.
-- Paul Dorell
Evanston, Illinois

I am surprised by how much nominally conservative writers on economics and finance have forgotten their economic history. Perhaps the new generation of economists and free marketers only give lip service to the work of Milton Friedman instead actually reading his work. Those of us who came of age as monetary economists in the 1960s and '70s religiously studied Professor Friedman's works. In The Monetary History of the United States Milton and Rose Friedman describe how the Federal Reserve turned a deep recession and correction into the Great Depression by failing to support liquidity in the banking system and precipitating two waves of bank failures.

Today's financial crisis bares a strong similarity to events in 1929-31. However, Mr. Bernanke seems to have read his history and is taking steps to ensure that the banking system remains liquid even it means bailing out an failing investment bank. He also seems to be trying to avoid the key mistake that led to the second wave of banking failures in 1931-33 that almost brought down the nation. The banking and financial system stabilized by 1931 but then European nations abandoned the Gold Standard. Instead of letting gold float, the Fed attempted to defend the dollar as gold reserves left the country. The result was a second liquidity crisis that resulted in a nationwide banking collapse. Had the Fed provided liquidity instead of defending the dollar there would have been no Great Depression.

The literature on exchange rates makes clear that floating a country's international value decouples domestic monetary policy from international shocks. It allows the monetary authority to concentrate on either controlling inflation or providing necessary liquidity in a crisis. A weaker dollar will have negative repercussion but they will be far less then if a dollar defense wrecks our financial system.

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