The American Spectator

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Unbearable

3.19.08 @ 12:01AM

(Page 2 of 4)

The purpose of monetary policy is to ensure that the system remains liquid in crisis. The Federal Reserve should be applauded for its wisdom in fulfilling this role today.
-- Jerrold Goldblatt
Arlington, Virginia

As I read Philip Klein and Paul Krugman's articles about the Fed's recent actions viz Bear Stearns and the wider financial markets, I was impressed by how similar their assessments are, to a point. Both appear to agree on the following:

Bear Stearns deserved to be allowed to fail because of its economic practices and to teach Wall Street not to expect governmental bailouts.

Nevertheless, the Fed aggressively intruded into the market to save Bear from bankruptcy.

Consequently, taxpayers could be on the hook for millions of dollars because of the Fed's actions.

And, J.P. Morgan is the primary beneficiary of this corporate welfare.

Furthermore, the Fed cut a key interest rate and is likely to do so again to shield the market from the consequences of costly mistakes.

What accounts for the Fed's actions? According to Mr. Klein, "In the aftermath of the Sept. 11 attacks, then Fed Chairman Alan Greenspan was eager to avoid a recession. While at first it may have been prudent to cut interest rates, Greenspan went on one of the most aggressive rate-cutting campaigns in the history of the Fed, and mortgage rates tumbled to historic lows." Mr. Krugman elaborates on this when he writes, "Between 2002 and 2007, false beliefs in the private sector -- the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe -- led to an epidemic of bad lending." TV commentator Larry Kudlow referred to this time as "the greatest story never told."

Klein and Krugman differ on one important point. Mr. Klein believes the government should have let the chips fall where they may. Of course, he has no way of knowing what the consequences of that inaction would be. Neither did the Fed and they were unwilling to take the risk. Mr. Krugman writes: "Meanwhile, false beliefs in the political arena -- the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing -- led Washington to ignore the warning signs." Far too late, in my estimation, Ben Bernanke and Secretary Henry Paulson admitted that with proper government regulations and oversight we could have avoided this crisis.
-- Mike Roush
North Carolina

Granted, I am not an economist nor do I play one on TV; but I just don't see this as a bailout of Bear Stearns. After last weekend Bear Stearns is no more. Its stock is worthless and its shareholders have lost everything they invested in the bank. Seven thousand employees of Bear Stearns will be without jobs.

Now, can you please tell me again how this was a bailout? Didn't the Federal Reserve assist in a buyout by helping JP Morgan Chase buy Bear Stearns at $2.36/share? That's a bargain basement price for a company whose stock sold for more than $170/per share a couple years ago.

I think Mr. Klein may be pulling his shirt over his head and running in circles at this moment. Our national financial situation is precarious and not great, but we are not going over the falls in a barrel. Please calm down.
-- Judy Beumler
Louisville, Kentucky

For an observer to understand Fed actions regarding Bear Stearns (BS), one must distinguish between whether BS was experiencing a liquidity crisis or a solvency crisis. A liquidity crisis could have been averted by a temporary extension of credit from the Fed until BS could achieve an orderly liquidation of its assets to satisfy creditor demands. BS must demonstrate that it has sufficient assets (collateral) and it is in basically sound financial condition to be eligible for a temporary injection of liquidity. Obviously these conditions could not be met and creditors determined that BS was technically insolvent if its assets were discounted to current market values. This determination of solvency is not readily apparent to the casual observer, but rather must be arrived at by means of a critical evaluation of the kind and quality of the assets held by BS.

While this situation would normally be a private transaction between BS and its creditors, Fed intervention was apparently necessitated because of the potentially deleterious ramifications of a BS default on its vast liabilities and counterparty obligations throughout our entire financial system. Therefore the Fed arranged what is called a "Purchase and Assumption" transaction whereby financially responsible parties are invited to make a bid on what is left of the BS business franchise. In return the successful bidder must assume all the liabilities and counterparty obligations owed by BS.

It is my understanding the there were five or six potential acquirers of the BS franchise and JP Morgan was the successful bidder at $2 per share which will be paid to BS stockholders in the form of a fractional share of JP Morgan stock. Morgan will now stand behind all the former BS obligations including Fed advances, if any. There should be no loss to the government or taxpayers, however, BS shareholders will take a bath estimated in the billions.

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