Leading Questions for Idiots…

Here’s a question one of you free-market libertarians can answer for me. The Federal Reserve bails out the disaster-waiting-to-happen that was Bear Stearns to the tune of $30 billion public dollars for the stated reason that it was too big to fail. There are plenty of other possible real reasons (which we may find out about if there’s any scrutiny of their records), but let’s assume that the stated rationale is true: if the company had gone bankrupt they would have triggered a domino effect throughout the rest of the market and disaster would have followed.

As a liberal I believe that the federal government has a responsibility to prevent disasters of all kinds that can adversely affect citizens, and the free-marketeers at the fed think so too (let’s assume for the sake of argument). We also agree, as I have heard many conservatives argue, that the government should use our tax money in the most efficient possible manner. Anything else would also be irresponsible.

Given all that, is minimal regulation followed by massive bailout the best possible use of resources? A $30 billion bailout costs $100 to every man, woman and child in the United States. Was that the very best way they could have spent that $100?

To put it another way, American taxpayers are all de facto investors in all of the very large Wall Street businesses. And not investors who get to share in the upside when the business is successful, no, no; we only get to participate on the downside, when the business fails. So our incentive, since we’re all smart investors, is to prevent failures from happening. So should we say: do whatever you want and we’ll give you cash if it goes bad? Is that smart?

In addition to the power to collect taxes and apparently to give vast quantities of that revenue away to corporations without congressional oversight, the government also has the power to pass laws. Here’s an idea: how about using that power to protect our investments? Why shouldn’t we?

For example, we could pass laws that would prevent any company from ever becoming “too big to fail.” If a company was reaching that point we’d simply require that it split into two companies. It might be slightly less efficient – although at the scale it’s hard to measure – but it would diversify risk which is all we care about. Isn’t that what any smart investor would do?

Or, if you don’t like that, perhaps there should be laws against the utterly retarded practices that led to Bear Stearns being in trouble in the first place. It’s not like these were clever innovations that had never been tried before; everything they did was obviously boneheaded to anyone who knew anything about the financial services industry. A tiny bit of “don’t do that, it’s stupid” would have saved everyone a lot of money.

Don’t you think $10 of thinking ahead is worth $100 of hindsight?

- jack*

Comments

[Anita]

Personally, I think that the Glass-Steagall Act should NEVER have been repealed in, what? 1999? I had a very weird premonition at the time that it would be a big, big mistake. And I'm not an economist or financial person. I'm a simple person who's read a little and taken a few finance classes, that's it. They should make ME Fed Chairman, no?

;)