Of course, the irony of today's Federal Reserve bailout of investment bank Bear Stearns is that the firm has a reputation as being among the most free-market loving on Wall Street—and that's saying something about a company located smack in the middle in America's financial capital. But just as there are no atheists in foxholes, there are no libertarians during financial crises, at least not if it's their dough at stake. And while there are plenty of economists out there who are advocating a hands-off approach to the credit crisis and housing implosion—echoing Andrew Mellon's infamous advocacy of "liquidate...liquidate...liquidate"—they will be disappointed. Uncle Sam will probably continue to intervene during this financial turmoil.Not exactly encouraging news.
And not just the Fed. More and more, it looks as though Congress, followed by a reluctant White House, will move ever more boldly to stop the hemorrhaging in housing and unfreeze the credit markets. Richard Bove, banking analyst at Punk Ziegel, says in a note this morning that it's "more certain than ever" that there will be a housing bailout to stop the increasing rate of foreclosures and the continuing drop in home prices. And political analyst Alec Phillips of Goldman Sachs says that he sees "a high likelihood that some type of housing measure is enacted this year."
Now, don't expect a financial miracle or a relaunch of the housing boom here. Instead, a bailout would give clarity to investors by shifting the price and foreclosure risk of the tumbling housing market to the government and taxpayers.
And there are other ideas floating around as well. Nobel laureate and financier Myron Scholes wants the government to inject capital into the banking system by investing in debt and stock. International Monetary Fund official John Lipsky, a Wall Street veteran, also thinks the government may need to put taxpayer money directly into banks. And Vincent Reinhart, the Fed's former chief monetary economist, told Bloomberg that the Fed is inching closer to buying up those beaten-down mortgage-backed securities.
Are any of these suggestions likely to happen? Today's move by the Fed, using a little-used Depression-era provision of the Federal Reserve Act, makes previously unlikely actions seem far more possible.
The trend is disturbing. We Americans are asking the govnerment to do more and more for us and we simply don't see the larger picture. Each time there is some crisis of confidence and the govnerment steps in to help, we give up a little more freedom a little more of our independence. What is interesting, in a troubling sort of way, is that supposedly free market bastions are running to this bailout idea and grabbing hold, thinking it is the only way out for them.
But what the govenrment will be doing is using taxpayer funds to subsidize bad or irrational behavior. The mortgage backed securities market created, in part this mess. In the past, a mortgage was between a lender and a borrower. Sometimes the mortgage would get sold to another lender, but there were usually just two parties to a mortgage. If the excrement hit the wind producing machine, it was in both the lender's and the borrower's best interest to come to an agreement or accomodation. Now with so many hands in the pot, it is hard for borrowers to find an accomodation and so the most rational choice for them is foreclosure, with all of its attendent consequences.
The problem of course is that there are hundreds of thousands of homeowners paying too much for a house they can't afford since they thought they could get into the house, make a bunch of dough on a hot market and keep going. But no rational decisions were being made as to the size of house (and mortgage) that they could afford. So now we are in teh mess and the only solution people can see is for the govnerment to help us.
But once the government helps you once, you continue to rely on government help when anything else goes wrong. I am not saying the govnerment is trying to do that to us, after all the govenrment is a reflection of ourselves. We need to find it within ourselves to fix the problems we created ourself. I am trying and it is starting to bother me that the money I have to pay in taxes is being used to help out someone who refuses to help themselves.
As a former servant of the government, I must say I fear the civil government in the United States more than I fear terrorism right now.