So that it's not ransom anymore
Probably the best (although still irritating) arguments in favor of the Fed bailout of Bear Stearns (or, more accurately speaking, entities that did business with Bear Stearns) is that the damage to the economy would have been so great that the Fed really had no choice. To the extent that that's true, Barney Frank's characterization of the Fed bailout as "ransom" sounds accurate to me.
As long as unregulated entities like hedge funds and lightly-regulated entities like investment banks are going to have such a strong impact on the economy that "ransom" payments like this are made, then the only way to address the moral hazard is to regulate what these places are able to do, especially now that the Fed is making loans from its "discount window" available to investment banks for the first time in seventy years.
The Bush administration, of course, doesn't like financial regulation and will likely resist proposals to regulate these industries more. But in the current economic climate it may not be possible to argue that markets correct themselves with a straight face. If markets are so self-correcting, what's the Fed up to?
As long as unregulated entities like hedge funds and lightly-regulated entities like investment banks are going to have such a strong impact on the economy that "ransom" payments like this are made, then the only way to address the moral hazard is to regulate what these places are able to do, especially now that the Fed is making loans from its "discount window" available to investment banks for the first time in seventy years.
The Bush administration, of course, doesn't like financial regulation and will likely resist proposals to regulate these industries more. But in the current economic climate it may not be possible to argue that markets correct themselves with a straight face. If markets are so self-correcting, what's the Fed up to?
Labels: economics
posted by honestpartisan | 12:06 PM
4 Comments:
My understanding that one of the philosophical reasons for the Fed in the first place is that although markets correct themselves, a mechanism that can smooth out (and slow down) this correction is desirable, and that is what the Fed does in other circumstances.
There are of course those whose 'pure market' ideology decries the notion of the Fed in the first place, but most people with knowledge on the issue agree that mechanisms to mitigate boom and bust cycles are desirable, even though the market will correct itself. Obviously the means and mechanisms of achieving this goal remain controversial, as does the question of the scope of such intrusions, but the general concept that self correcting markets function better with some smoothing isn't controversial, either amoung conservatives or liberals.
As to why this necessarily ties in with regulation, I am not entirely sure. It seems as though you want 'regulation' for its own sake, as some sort of punishment, rather then advocating something specific to achieve certain specific practical ends.
I'm puzzled by the implications of your comment. Do you mean to say that there shouldn't be a bailout as well as no regulation? If so, how do you deal with the argument that the financial system could sustain serious damage without a bailout? Or do you think that there shouldn't be regulation, but that there should be bailouts? If so, how do you deal with the moral hazard?
I think that their should be regulation if it will promote positive economic growth and I think that their should be a bailout (although I am still a bit unsure that the term applies here) if it will promote positive economic growth.
I don't necessarily see the two as being inexorably linked.
I am in no way for a bailout. I agree with some of your points that you can't privatize (though I wouldn't use that choice of words) sucess and socialize failure.
Yes, not bailing out that company is going to hurt. However, we can't bail out every comapny that goes under because of bad decisions. My contention is one of the reasons we have so many bad CEOs and lame companies out there (Ford, GM, GE, airlines come to mind) is our penchant for bailing them out on bad decisions they've made. Its bad enough we have to federally ensure thier extravagant pensions (at least only at 50%), now we have to cover thier losses too? Its insane. Our economy is undergoing a huge correction for some pretty bad decisions made both by lenders and investors and common people who've made some pretty bad decisions with thier money.
I don't think regulation is the answer here. First, as you've said a bail out certainly sends the wrong message, I'm not interested in bailing out failed enterprise. Seccond, while our economy will of course take a hit, it can correct and move on. Federal regulations and oversight and what not will make the problem worse, not better. I can't think of one area the FED has improved.
The silver lining of this is lenders and investment firms are hopefully going to start making more sound decisions... oh wait- not when the tax payers are there to bail them out. It incourages these idiots.
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