The US is lucky its foreign debts are denominated in its own currency. Otherwise comparisons to Argentine wouldn't be hyperbole.

And, while I know theoretical economics isn't your specialty, I would like to ask you anyway: How far should central banks go to bail out possibly insolvent banks, risking taxpayer money by attempting to do so? Because, while I understand wanting to averse the risk of total meltdown, there's also the simpler risk of wasting the money on possibly pointless corporate welfare.

I know very little about this, so wanted to hear if you have had thoughts in this direction.

When panic is in the air, it is hard to justify splitting theoretical hairs over limits.

I would say virtually everyone in the sector is now very, very worried. We are, globally, on the edge of a serious 1930s sort of crisis.

I thought the LTCM bailout was unnecessary and they should have sucked it. Now, Fed and other Central Banks with Financial Ministries need to do some emergency meetings. We are nearing a collapse of the dollar, and whatever schadenfreude one may feel in this area, the global financial system is truly near a collapse of systematic proportions. That ain't trivial.

Right now I suppose one has to work at making interventions sufficiently punitive to Bank and Fund Management that it serves as a lesson, while ensuring that funds flow to the real economy.

In terms of Bear Stearns, the entire Executive Management needs to be cashiered - maybe not tomorrow, but in the next month. Shareholders also have to be sure to feel pain so they learn the lesson.

Punitive pain was not the case:

The Fed, under Chairman Ben S. Bernanke, voted unanimously to lend the funds through JPMorgan because it would be operationally simpler than a direct loan to Bear Stearns, the staff said on condition of anonymity. The regulator invoked a little-used law that allows it to make loans to corporations and private partnerships, which required a Board vote, according to the staffers.

Just a loan, and through another bank. A little like this rant on The Exile:

In the exact replay of Yeltsin-oligarchs' strategy to steal and steal, the Central Bank bailout money is not directly from the government to Bear Stearns, because that makes it harder to steal those billions. Instead, it is funneled through another well-connected bank, J.P. Morgan, so that those corrupt bankers can also take a nice cut in the deal ("otkat" it's called). Essentially the "bailout" is a massive bribe from corrupt Bush to corrupt J.P. Morgan, and in return JP Morgan will buy the ruins of Bear Stearns with the government money (minus what they steal). Meanwhile plenty of billions make sure that major Bear Stearns principles all cash out well.

Eh? The shareholders of Bear have just seen almost all their investment go up in smoke, and management is likely to be toast. That's not pain?

And the Exile knows fuck all about financial markets. Whatever, populist whankers will whank no matter what action is taken as banks and finance have always been scapegoats (see the Jews and lending).

I get end-of-empire vibes off this stuff. Maybe not this time, but sooner or later.

It's being passed off as another LTCM, and critics are dismissed as Puritans or loony Progressives who don't understand modern banking. But LTCM was a secretive organization whose problems were due to some High Quant arcana -- fat tails, unexpected correlations etc. The housing bubble has been obvious for years, and there was ample evidence that many of the sales were fraudulent. Yet Greenspan in his jolly avuncular way advised people to step up for ARM deals. More constructive advice would have been to tell them to take up cocaine as a boost to personal productivity. Bernanke has been Chairman for 3 years or so, and has done nothing to address the basic problem with regulation.

It's like the apologetics for one of the Blond Celebrity Diaster women. Like "She had to hit that pedestrian because she was fleeing from the abusive boyfriend, and according to quantum theory it's all interconnected through the wave functions. But she's finally found a wonderful color therapist, except that the checks for his fees bounced because her trust fund is going up her nose. And if you understood Einstein's point about time slowing down near the speed of light, it would all be clear."

I have no desire to see Britney or Lindsey punished. But I don't want people like their facilitators and apologists in charge of the banking system.

Lounsbury, is it wrong to think that those who approved of and pushed those subprime loans should be the ones to pay for it? Does it seem right that American taxpayers, on top of paying for a war that 'should never have been waged' should now also pay for bailouts of financial companies that benefitted from greed and short-sightedness?

One recognizes that total collapse would be appalling, but how can the US ensure that those responsible for this devastating crisis are the ones taking the punishment? Is not some moralizing and condemnation called for?

Perhaps one positive thing to come out of this is that America couldn't really afford to go to war with Iran, even if there were sufficient troops and the strategic environment was set; on the other hand, W and crew have shown remarkable short-sightedness in the past.

on one last related point, what do you think of W's speech on friday, where he said that he thought 'the economy is fine' and re-capped some of the nightmare crises he's dragged his nation through:
http://www.crooksandliars.com/2008/03/18/tds-on-bear-stearns-government-bailout-or-free-market-reinvigorment/

Punishment, sure. But first you need stability. The US is at the edge of a financial collapse. Playing morality games is for after.

You seem confused on the rescue. Bear owners including 30% who are its employees were effectively wiped out. JP, which largely avoided the sub-Prime mess (ergo I should think for the moralisers out there not to be punished willy nilly) is getting a subsidy on assuming Bear Stears business.

As for Ibn Bush's speech. The cretin should keep his mouth shut.

Paulson, Bernanke et al deserve praise for improvising a solution to the problem over the weekend and avoiding meltdown. They were like the crew of a commercial flight that runs out of gas miles from an airport. We expect them to make an emergency landing, not to go into a pout because the ground crew were careless.

But in the larger context, the problems have been publicized for years, and the Feds did nothing. And there will be no after. Consequences yes, but little relation to behavior that caused the problem.

Even here, some innocent people are taking losses. Most of the Bear employees didn't work in the area of mortgage-backed securities. Many institutions held Bear stock that vaporized. There's some justice, but it's doubtful that it's accurate enough to provide incentives not to misbehave in future.

One argument is that it's due to brain-damaged ideology. In the 19th Cent commercial banks routinely issued their own money. The result was a series of scandals, scams and bubbles recounted in Kindelberger's book. Society decided that creating money should be a regulated monopoly, with pretty good results. The original JP Morgan certainly approved.

The amount of derivatives paper the banks have created dwarfs the official money supply, and some fraction of it is toxic and has to be deleveraged. Good luck on getting the current administration to address the problem.

Keep in mind that it is unclear whether JP Morgan got a good deal or not. What happened to Bear Stearns could happen to anyone, even JP Morgan. It wasn't that Bear Stearns was broke, it was that nobody, including Bear Stearns, could tell if Bears Stearns was broke or not. In the absence of information, all the market players adopted a herd mentality. It's often difficult to tell why stampedes begin. But it's not always because the herd perceives a real threat. Of course, once Bear Stearns started getting cut off, it really was in trouble and the stampede really did make sense.

It is entirely possible that JP Morgan got one of the best deals in history. If Bear Stearns was a train wreck, it was a slow-motion one. The problems in its porfolio will play out over the next 18 months as subprime rate resets work their way through the system. I'm thinking that, when the smoke clears, Bear Stearns will prove to be worth a hell of a lot more than $250 million. Just their headquarters is worth about $1.5 billion.

For evidence that this whole saga is completely irrational, look at Bear Stearn's stock price. It trades at about $5/share. This despite the bizzare lock up provision that makes it impossible for Bear Stearns to sell itself to anyone else for an entire year. Worse, it even prevents JP Morgan from offering more money Bear Stearns for an entire year. So much for the perfect market hypothesis. If there were ever a stock to short, it's Bear Stearns.

Does anyone want to comment on the relevance of comparing this collapse to the collapse of [hedge-fund firm] Long-Term Capital Management back in 1998?

There's a CATO article advocating AGAINST a bail-out of LTCM, basically arguing that it would lead to more calls for regulation of hedge funds, extend the responsibilities of the Federal Reserve, encourage irresponsible risk-taking if firms thought that the Fed would bail them out, and undermine attempts to advocate economic liberalization in other economies.

http://www.cato.org/pubs/briefs/bp-052es.html

What are your thoughts, Lounsbury in particular?

Ideology. Works fine in theory. Not so well in fact.

Irresponsible risk taking generally occurs regardless. Moral Hazard in some ways is overdone, I don't believe my financial colleagues take more risk because of an inherent belief in being rescued, but rather rescues may keep over-risk taking in the system.

However, at the same time much of what occurred of late was in the context of supposed proper Risk Management. The problem arose in the underestimating, systematically, the long term risk of a blow up - what some are calling a Taleb event now.

I don't believe one can have unregulated financial markets actually - the history of unregulated financial markets is not terribly enlightening whatever our Cato types want to believe. What I do believe in is market oriented regs. It strikes me that Greenspan's error was in being a regulator with a wilfully Cato-ish world view, but also not hard brass balls to exercise power a la Volcker. Worst of both worlds.

The US regulatory authorities should have been (and were warned even within) watching credit quality.

I should add that I regard purist ideological approaches to market liberalisation as one of the great threats to real, sustained, market liberalisation.

The reality is people don't like liberal markets much. It scares them. And sometimes, in the short term, market twists can be brutal.

So, regulation, like say insurance, is about selling off some of the upside for protection.

Nothing wrong with that, so long as one does not over-insure, and strangle off the cash flow for no good return.

The Cato/Ayn Rand type ideologues want to go gack to a nonexistent golden age when people didn't have to worry about their property and markets were perfect. In the real world property doesn't exist without courts and police and armies to maintain it. In the present instance, we have the Fed because JP Morgan didn't think we could deal with another 1907 Panic. JP was no airhead, and certainly not a Marxist.

It's amazing that people could fret about LTCM and be no more upset with BS. LTCM was run by respectable people, blew up without warning and was liquidated with private money. If it had gotten through the margin calls, the assets were fine after the markets stabilized. The transaction was transparent, at least after the fact. WE know fairly accurately who got what. Here, the Fed used JPM as a bagman to back toxic paper, allowing JPM to confiscate the good assets in the process. And we'll never know the details. Jamie Dimon is my nominee for smartest mammal in the Northern Hemisphere.

JP Morgan just increased its offer for Bear Stearns by a factor of 5. That shows you what I know. This is why you should never get investment tips off of the Internet.

Roger, besides being a good internet cancer advisor, you've got sharp notes on finance! I like that.

In the present instance, we have the Fed because JP Morgan didn't think we could deal with another 1907 Panic. JP was no airhead, and certainly not a Marxist.

Precisely.

Re the JP - Bear thing, now that the panic is ... well on hold, the private wrangling commences. The problem I see with Bear is you have assets that are near term impossible to value, but long term probably worthy. Dimon might have overplayed his hand, but he does have a trump. Threaten to walk away and the Fed put goes away. See what happens then.

Amigo Anon said
What happened to Bear Stearns could happen to anyone, even JP Morgan. It wasn't that Bear Stearns was broke, it was that nobody, including Bear Stearns, could tell if Bears Stearns was broke or not. In the absence of information, all the market players adopted a herd mentality.

That's bloody well right. And frankly no one still knows whats straight or not. The upping of the low ball to 10 strikes me as maneuvering - valuing Bear at less than even a fire sale value of its basic assets was panic value - and likely to lose current management their jobs, but better cut a deal than see melt down.

Roger, besides being a good internet cancer advisor, you've got sharp notes on finance! I like that.

In the present instance, we have the Fed because JP Morgan didn't think we could deal with another 1907 Panic. JP was no airhead, and certainly not a Marxist.

Precisely.

Re the JP - Bear thing, now that the panic is ... well on hold, the private wrangling commences. The problem I see with Bear is you have assets that are near term impossible to value, but long term probably worthy. Dimon might have overplayed his hand, but he does have a trump. Threaten to walk away and the Fed put goes away. See what happens then.

Amigo Anon said
What happened to Bear Stearns could happen to anyone, even JP Morgan. It wasn't that Bear Stearns was broke, it was that nobody, including Bear Stearns, could tell if Bears Stearns was broke or not. In the absence of information, all the market players adopted a herd mentality.

That's bloody well right. And frankly no one still knows whats straight or not. The upping of the low ball to 10 strikes me as maneuvering - valuing Bear at less than even a fire sale value of its basic assets was panic value - and likely to lose current management their jobs, but better cut a deal than see melt down.