The Fed's actions in regard to the near-death of Bear Stearns is a classic example of damned-if-you-do/damned-if-you-don't. With its involvement, the Fed opened itself up to endless comment (much of it vituperative) about government interference in business, Washington's favoritism of Wall Street over Main Street, and the Fed's wading into policy waters that it may not be able to master.
The deal itself also failed to get unanimous support: JP Morgan Chase, following anger over the fire sale aspects of the Bear Stearns takeover, belatedly suggested increasing its Fed-engineered takeover price from $2 a share to $10 a share – but the Fed is now voicing its displeasure over that new price.
But if the Fed had not intervened and if Bear Stearns collapsed into ruin, the debacle would've resonated with one of the greatest panics this side of 1929. And, of course, the Fed would've been blamed for doing nothing.
Ultimately, the Fed's intervention was, in the short-term, a Pyrrhic victory: it saved Bear Stearns from extinction, but it damaged the level of confidence in the state of the economy. The long-term view will be different, assuming the response to the Bear Stearns collapse was an anomaly. If that is the case, we can credit the Fed for making a brave (but difficult) choice under the most extraordinary circumstances imaginable – and hope the Fed did the right thing.
But what happens when other investment banks start to flatline? Is it the federal government's role to use taxpayer funds to bail out every ailing investment bank? Quite frankly, what is the Fed's response (and, for that matter, the White House and Congress' response) to the next Bear Stearns? Considering this response was improvised and involved a hasty rewrite of the Fed's rules of engagement, we have to stop and wonder whether this is the shape of thing to come.
The British newspaper The Independent commented on what transpired with the flippant remark, ‘Fancy a game of dominoes?’ That's really not funny, but the question needs to be asked. What also should be asked are questions along the lines of the following: ‘Just how sound is the U.S. economy?’ or ‘Are other Wall Street powerhouses also showing signs of short-circuiting?’ or ‘Can the federal government afford to intervene again?’
Unfortunately, too few people are asking those questions. Economics is not a sexy subject for the media or the general public to talk about. Indeed, a great deal of the mainstream media's attention during last weekend (and the subsequent public discussion) was focused away from the Fed's actions and onto bizarre remarks made by Sen. Barack Obama's pastor. Outside of the financial press and a handful of mainstream media outlets that takes economics seriously, the story truly didn't resonate with the general public.
Prior to the Bear Stearns episode, economists and politicians were hair-splitting on whether or not the U.S. is in a recession. The Wall Street Journal, no one's idea of a Henny Penny, went beyond the concept of recession with this description on its editorial page: ‘The Fed is making these commitments under the authority of a Depression-era statute that has rarely, if ever, been invoked.’
The Journal's language is hardly accidental – invoking the Great Depression to talk about today's environment should give everyone pause to shudder. But after pausing, we need to know where we are going from here. It is time to start asking questions of Wall Street and Washington…and demanding real answers.
– Phil Hall, editor, Secondary Marketing Executive
(Please address all comments regarding this opinion column to hallp@sme-online.com)
