capitalists asking for trouble, or "the visible hand"

passing GO

We're telling them, "we're not going to regulate you, and we're going to bail you out when you fuck up."

I didn't say it. It was Barry. It was just a few minutes ago. He was replying to my reading outline the Reuters headline, "Bear near announcing sale to JPMorgan: source". Like many others who happened to be noticing what's been going on, I had already been shocked to hear that my government had decided to throw a "financial rescue package"* at Bear Stearns, a quintessential capitalist firm which had failed at capitalism (slapped by "the invisible hand"?). This afternoon we learn that one of its rivals had decided that now Bear Sterns was an attractive investment.

NEW YORK/WASHINGTON (Reuters) - JPMorgan Chase & Co (JPM.N) is close to rescuing the fifth-largest U.S. investment bank, Bear Stearns Cos Inc (BSC.N), a person familiar with the matter said on Sunday, in a deal that could be announced in the next few hours.

Of course none of these people went to jail, but none of them even lost their jobs and none of them lost their ginormous bonuses.

But it's looking like the country's about to lose its shirt. I know these lines are a gross simplification of the economics drama being played in the headlines (and conducted behind our backs), but Gretchen Morgenson's piece in the NYTimes today both explains it in super-lay-person terms and suggests the horror of its potential (likely?) consequences. Here's just a peek:

HERE is the bind the Fed is in: Like the boy who puts his finger in the dike to keep sea water from pouring in, the Fed finds that new leaks keep emerging.

Regulators must do whatever they can to keep the markets open and operating, and much of that relies upon the confidence of investors. But by offering to backstop firms like Bear, who were the very architects of their own — and the market’s — current problems, overseers like the Fed undermine a little bit more of that confidence.

Another worry? How many well-capitalized institutions remain at the ready to take over those firms that may encounter turbulence in the future? Banks just do not have the capital that is needed to rescue troubled firms.

That will leave the taxpayer, alas. As usual.

And this excerpt doesn't even address the consequences of foreign investors losing confidence in our capital markets and our government's ability to keep things together.

Hold on; we're in for a very rough ride.

"The size and terms of the credit line were not disclosed. JPMorgan will borrow the money from the Fed and lend it to Bear Stearns, and the Fed will ultimately bear the risk of the loan." [quoted from an earlier NYTimes article, "Run on Big Wall St. Bank Spurs Rescue Backed by U.S."]

[image from Hasbro]

The government has not regulated these people and the reason we are in this mess is predatory lending practices allowed by Bush and company. There's a reason in most 1st World countries, you're required to put down at least 20% on a housing purchase.

Anyway, the one point that you and the Times' reporter are missing is that if the Fed would have allowed Bear to go belly up, you would have seen a domino effect with every major bank and many commercial banks failing within minutes. The large banks trade, borrow and just generally depend on each other to keep the markets going.

If the Fed would have allowed Bear to fail, the entire U.S. financial system would have imploded due to a run on investment banks by those who invest in them - from pension funds to the wealthiest 5% (who own 75% of the economy) to foreign investors, etc. That would in effect make all securities worthless. That could not be allowed.

But I've missed nothing of the kind, jacson. I think you miss my point. I'm not condemning the attempt to rescue the economy, but rather what Washington's ministrations will not do. We could argue until the cows come home about what to do with the wreck of our capital economy, as we could about what to do with our disastrous occupation of Iraq, but I'm just not interested in merely dressing wounds; I want to see their cause addressed.

I'm assuming that nothing fundamental will be done about either our broken markets or the endless war, but I still believe it's worth seeing ensuring that those who are responsible for these debacles are not permitted to continue profiting materially or professionally from their greed, arrogance and stupidity.

[Paul Krugman in his column today: "As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose."]

In fact however, just as I have no illusions about our chance of success in getting out of this financial mess, and less about our ever leaving Iraq, I think virtually no scoundrels will actually be kicked out into the cold and fewer still brought to justice. So maybe I'm only talking to myself, about nothing at all.

Thanks for clarifying. The bottom line is Greenspan and cronies made credit so cheap that the citizens got housing for nothing, the ibank execs got rich, the politicians got campaign contributions and now we are at this point. Wouldn't it be nice to hear more than the Dems talking about helping these poor souls who have had their homes repossessed and the Repubs talking about bailing out the economy? I don't know what you do with the execs at these companies...they've lost much of their fortume - but still have fortunes. I don't think you can really do anything with these people - the Federal Reserve as fed this beast for too long. Give a loan shark an opening and he will take advantage. We have hit a perfect storm of cheap credit, nat'l debt (thanks to Bush's Iraq occupation), and increased oil prices (those oil fields in Iraq have only helped Exxon et al). Anyway, it will be nice to maybe see NYC return to a more livable place where neighborhoods improve in 5 years, instead of buildings with character razed and replaced by developers vomited visions of a suburban utopia.