Megan McArdle On Bear Stearns

I noted earlier that it was a mess and I think it still is. But as Megan McArdle points out, it is better (very marginally so) than bankruptcy:

This was always the most likely outcome--of the American bulge brackets, JP Morgan has the largest balance sheet and access to the Federal Reserve's discount window. Now that it's happened, we can breathe a sigh of relief that one gigantic disaster has been averted. Libertarians and liberals arguing against the Fed's role in all this sound to me either ignorant or psychotic. The credit markets are already badly malfunctioning (yes, I was wrong). Bear Stearns is the counterparty to a huge number of transactions. Allowing it to fail would have been like throwing a hand grenade into a burning pool of gasoline; bankruptcy proceedings are time-consuming and uncertain. JP Morgan has the ability to assume their risks without any danger of going under themselves; that's very good for the markets, and by extension, us.

However, Megan does hedge her bets about future messes.

There's an argument, of course, that successive Fed interventions, starting with the Russian bond crisis, have turned bankers into ever-greater risk takers, making each crisis bigger and more expensive than the last. The thinking goes that we need to draw the line here, whatever the cost, because if we let the financiers go on their merry way, eventually they'll create a wave that will swamp the Fed's power to intervene. Possibly so, but from what I hear, the people on Wall Street are pretty much scared right down to the tips of their Gordon Gekko underoos.

In some sense, right now it's the Fed's job to manage that fear--to scare them enough to ratchet back their risk profile, without scaring them so badly that they hunker down inside their weekend house and refuse to buy or sell anything. That's very tricky, and since in the long run we'll all be dead, I'd rather the Fed err slightly on the side of cheering them up. Perhaps Helicopter Ben should start pumping anti-depressants into the Wall Street water supply.

Because while we have, as I say, averted one gigantic disaster, there are still plenty of potential other ones waiting in the wings.

There is justifiable risk, and then there is silly risk, I can almost assure you that somewhere along the line, we will find out when Bear Stearns crossed that line.

While JP Morgan buying out Bear Stearns avoided what could have been the most far ranging bankruptcy in a very long time, it still doesn't address the underlying problems of how the credit markets are regulated (and I fully believe that a good part of the problem is related to regulation). I don't want to see a Sarbanes/Oxley over reaction, but knowing the nature of the current Congress and their desire to use any crisis (real or imagined) to legislate new regulations to "protect the consumer," credit regulation is almost surely on the horizon.

That is what is truly bad for us.