Monday, March 17, 2008

The Bear Pit

Well, Bear Stearns has been sold to JPMorgan for a cup of coffee per share. The building Bear Stearns owns is alone worth about four times the purchase price. Of course JPMorgan didn't just get the company but also about 30 billion dollars in loan guarantees from us taxpayers. Neat, is it not?

There are at least two separate questions about this sale: One has to do with the 60,000 dollar question whether it will have the intended effect: to staunch the bleeding in the seriously ill financial markets. I have nothing clever to say about that, because I can't read the future, sadly.

The second question is a more fundamental one, and it has to do with the old political battles between those who believe in the god of free markets and absolutely no government intervention (none!) and those who believe in something a lot more restrained and bureaucratic. I'm in the latter camp for the simple reason that the current problem has its roots in the violent resistance towards any additional regulation of the financial markets since the 1990's. The dominant view was that the markets would regulate themselves and that the innovations of the mostly unregulated markets were all Good Things.

Of course, some of those innovations are exactly what led to the collapsed mortgage markets, to the repackaging of bad loans inside large bales of loans, to be sold on, so that ultimately nobody could tell which loans were bad or even what percentage of bad loans each bale contained. Once that happened the seed was sown for what we are now reaping, and the sad thing is that we are all reaping the punishment harvest, while only some people reaped the great benefits of this scheme.

Did you spot the funny thing about all this? As long as the markets looked good the government was told to keep its filthy fingers off it, but once the troubles started the government is supposed to step in and fix them. You really can't have it both ways.

Neither can you make the argument that some risk-takers in the market have earned so much for the very reason that they assume risks if then we don't make them actually experience the downside of a risky market. In short, if the large incomes of certain individuals and firms are payment for successful risk-taking, we should see equally large losses by other individuals and firms. We shouldn't see the government stepping in and saving people. After all, they didn't bother to save people after the hurricane Katrina destroyed a city.

So much for the principles. In actual life, something needs to be done about all this, to protect those who are not at fault for the crisis. I agree with Krugman that the bailouts should be done carefully and that the major players themselves should not be bailed out. They were supposed to be the risk-takers, remember.