Bear attack

I'm a libertarian. Shouldn't I be angry about the Wall Street bailout?

Yes. No. Sort of.

Let me explain.

I am not the sort of libertarian who thinks that any and all financial intervention by the government is definitionally a bad idea. I am in favor of the Federal Reserve. I am the lone defender of the FDIC at libertarian events. I have been known to find kind words for the SEC. So I am not, in principle, opposed to this sort of bailout on the grounds that this is not the government's job.

Liberals like Paul Krugman and Kevin Drum are up in arms about the notion that the financial sector is privatising benefits while the public sector is taking on all the risk. They are looking for a way to make the bailout hurt for the bankers.

Readers may be surprised to learn that I basically agree with them. The bankers who decided that they had repealed the law of averages should suffer. A lot. Every time they get on the jitney to the Hamptons, I want them thinking "Did I leave the uncovered credit risk on?" Many of them should lose all their money pour encourager les autres. This is not about bailing out Wall Street; it's about bailout out us.

As with the people who took out unwise mortgages, I am in favor of having the government make strategic interventions to shore up the markets, but I think that they should make it hurt. No one who took excessively risky behavior--even if they honestly didn't realize it was excessively risky behavior--should escape without getting spanked, hard. Pain is nature's way of saying "Don't do that!", a lesson that apparently a lot of us needed to learn.

There will still be some sort of moral hazard, I think (though the mysterious knzn does have a point), in that bankers will not be as cautious about systemic risk as they should be. Alas, we live in an imperfect world, and the price of preventing catastrophes is that you will have more of them to prevent. Ultimately, that's a price I'm willing to pay. And I think you should be too. The people screaming that we ought to let the banks fail don't seem to realize that they, too, can be thrown out of work in the resulting hideous recession.

In the case of the employees and shareholders of Bear Stearns, I think they're probably hurting just about right; most of the Bear Stearns bankers will lose their jobs, and most of the shareholders will lose their shirts. This is as it should be.

Comments

The Federal Bank is financing the $326 million buyout of Bear Stearns by JP Morgan through a special financing deal.

Wow. I didn't know $30 Billion debt that's on vanishing assets was worth anything.

I still remember the years of rising house prices in the early 2000's, when house prices were crashing in Australia and Britain, being reassured by Greenspan that it's not going to happen in the US. Wasn't that the period when if the stock market was bad, investors moved to real estate? Wasn't the Economist telling the P/E equivalent to the real estate (house prices to individual earnings) was overblown, and a housing crash was imminent?

The crash has happened because of a number of reasons, one of it being sub-prime mortgages. Companies pay the price of bad decisions. By propping up Bear Stears in the form of JP Morgan, the Federal Bank is trying to prop up the 'confidence' of the investment community.

I’m not a big fan of investor confidence or consumer confidence. For me, share prices are based on current and future earnings potential of a company. If day traders want to trade on other people’s expectation on current and future earnings potential, then it’s their business. If they win or lose money, they gambled, and they deserved it.

All the Feds are doing is to prop up the day trader equivalents in the investors. The wise ones already have exited the market.

Posted by SP | March 17, 2008 12:12 PM

"I am not the sort of libertarian who thinks that any and all financial intervention by the government is definitionally a bad idea. I am in favor of the Federal Reserve. "

If Libertarians could be as pragmatic as MM, they would attract more attention.

Posted by Kim | March 17, 2008 12:22 PM

Seems to me the only folks gettng bailed out in this deal are the bond holders of Bear.

The stock holders and employees have lost nearly everything.

JP may have gotten a great deal, but I read that KKR was there with a rival bid so it at least was not a single bidder deal.

The folks who lent Bear money however look to be paid in full. And if the mortgages Bear holds sour the fed will be stuck with them and the money the fed lent will go to pay off Bear's lenders.

Posted by eccdogg | March 17, 2008 12:25 PM

i agree with megan: there are a lot of people
at fault for the mess we're in. but it's not
unreasonable to be especially angry at bankers like james cayne, who, although a lot less wealthy now, won't be missing any meals.

but let's not bring back stocks and the pillory.
public hearings, maybe.

Posted by andrew hartman | March 17, 2008 12:32 PM

Not all Bear Stearns employees wil be hurting.

JPM-Chase has budgeted something at or over $1 billion for severence packages for senior managers @ Bear Stearns. They only paid the owners of the company about $250 million to buy it.

Managers who had a lot of stock took a big loss (but not as big as others since they paid far less than market on their options, back in the day) but will still get more than owners got.

Yes, senior managers will face a LOT of shareholder litigation, but their severance payouts will be structured to make them as judgement proof as possible.

And they'll all resurface at whatver replaces hedgefunds as the next hot thing in a couple of years.

Posted by Plebist | March 17, 2008 12:32 PM

If Libertarians could be as pragmatic as MM, they would attract more attention.

This sounds all well and good and pragmatic. However, it's just nonsense written by someone who doesn't understand financial or monetary policy.

Losses are not divine punishment. They aren't revenge. They're simply pricing signals that tell actors how to value the assets they hold or seek to hold. When creditors are shielded from these losses, it just distorts the market. 300 million people make economic decisions every day that result in profits and losses on the small and grand scale. For the most part, we don't have government come in and shield them from the consequences of their bad decisions.

That's because losses are as essential as profits to figuring out where to invest in a complex economy. It's precisely because the economy is so complex, that intervention into it by government by guaranteeing the losses in the market is doomed to fail.

Now, after you've all left this comment thread and news story to talk about the next big news story, the financial markets are going to limp along. A housing market that would've cleared out in a year or two, is going to take 5-10 years because of the freezing of interest rates.

A financial market that would've cleared out in a year or two is going to take 5-10 years, followed by the next bubble and collapse, because of the Feds policies.

At least that'll give Megan McCardle something to write about and sound so pragmatic in 2017. But for the rest of us, it's not going to be as pleasant.

Incentives matter.

Posted by Joe Strummer | March 17, 2008 1:39 PM

Wasn't much of this caused by the State "encouraging" lending to people who probably shouldn't have gotten loans, from the fiscal point of view, in order to "do good"?

(Though the issue of marketing the debt as in poorly-accounted packages is another, and more open to moral hazard arguments if there's ever an actual bailout of the debt itself - or a general expectation of same.)

(Whether the "good" was financial stimulus, "getting the home ownership rate up" for whatever reason, etc., makes little difference.)

As a libertarian critique, that has even more force.

Posted by Sigivald | March 17, 2008 2:07 PM

The difference between Ms. McArdle and me is that I actually worked on Wall Street. There is only one way to instill fear in these people, and that is to cart enough of them off to jail to make everyone else look over their shoulders.

If you just take their money, they'll find a way to make some more of it. But put 'em in a cell for a few years, and that's a horse of a different color. Things will change, faster than you could ever imagine.

Posted by CP | March 17, 2008 2:08 PM

Blow it out your ass, McGargle.

Posted by Jane Gall | March 17, 2008 2:50 PM

"I am not the sort of libertarian who thinks that any and all financial intervention by the government is definitionally a bad idea. I am in favor of the Federal Reserve. "--MM

If Libertarians could be as pragmatic as MM, they would attract more attention.

Posted by Kim | March 17, 2008 12:22 PM

"If Libertarians could be as pragmatic as MM, they would attract more attention."--probably because they'd be indistinguishable from the Socialists that Parade under the banner of 'Republican' and 'Democrat'...nothing like being a 'pro-State'-Libertarian..

Posted by MEH | March 17, 2008 3:27 PM

Let me explain.

There is no need to explain, Megan, because it is obvious to most of us that you are not in fact a libertarian, but are instead a corporatist.

Posted by spencer | March 17, 2008 3:55 PM

Excellent post, MM. But there are a few commenters here that are out to lunch.

A financial market that would've cleared out in a year or two is going to take 5-10 years, followed by the next bubble and collapse, because of the Feds policies.

That may very well be true. But you're pretending the "pain" has a fixed quantity. Too much correction in too short of a time will cause other industries to fail. Personally, I think if shifty bankers and stockbrokers had to get real jobs for awhile that would be a good thing. But not if it means a 30% unemployment rate. Even libertarians can't get away from the fact poor people vote, and pissed-off poor people usually vote for the statist solution.

The difference between Ms. McArdle and me is that I actually worked on Wall Street. There is only one way to instill fear in these people, and that is to cart enough of them off to jail to make everyone else look over their shoulders.

That's ridiculious. Throwing people in jail won't do a damn thing to fix the system, especially if they haven't actually done anything illegal. What will fix the system is making sure people undervaluing risk get burned. In this case, that would be people who put money in hedge funds headed by 25-year-olds who've never seen an economy that wasn't going great guns.

Posted by Eric | March 17, 2008 8:22 PM