Federal Reserve Chairman Ben Bernanke speaks at the National Community Reinvestment Coalition annual conference, Friday, March 14, 2008, in Washington. (AP Photo/Pablo Martinez Monsivais)
by Frank James
The news that JP Morgan Chase has agreed to buy the troubled investment banker Bear Stearns at the ridiculously low price of $2 a share, less than a tenth of what Wall Street valued that stock as recently as Friday, is truly mind-blowing.
It’s clearly a deal that would not have happened if the Federal Reserve and its chairman, Ben Bernanke, who seems to have a firefighter’s instincts, hadn’t stepped in to guarantee that if Bear’s assets decline, which is likely, that the central bank (i.e. U.S. taxpayers) will take the hit and not JP Morgan.
Sunday was no day of rest for the Federal Reserve as it worked overtime to keep the financial markets and U.S. economy from going over the cliff because of the mortgage mess and the resulting credit crunch.
Besides making as much as $30 billion in financing available to make the JP Morgan-Bear Stearns deal happen, it also lowered its discount rate which is the interest rate it charges to banks for overnight loans.
And in a move meant to shore up other investment banks that could otherwise find themselves with cash shortages like Bear’s, the Fed opened its so-called “discount window” to investment banks so that they could take out short-term loans, just like commercial banks.
If all this was meant to boost investor confidence, it didn’t seem to have that effect initially.
The world’s financial markets opened sharply lower as the Fed’s dramatic moves just made many people fret about what other shoes would drop and when. We can expect continued talk in Washington, especially on Capitol Hill, about the federal government creating a moral hazard by its actions, the notion that if the government bails out Wall Street for its bone-headed financial moves, that lessens the penalty for such risk-taking behavior, increasing the likelihood that it will happen again.
But the Fed clearly believes the moral hazard concern is the lesser of two evils right now, with the greater evil being a further meltdown of the financial markets.
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Still, what’s that great line by John Kenneth Galbraith about socialism and the U.S.? Oh yes, “In the United States, the only acceptable form of socialism is socialism for the rich.” Hard to argue that the late economist wasn’t on to something after what we’ve just witnessed.