Life is unfair, and so is the bailout

Marketplace Staff Mar 17, 2008
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Life is unfair, and so is the bailout

Marketplace Staff Mar 17, 2008
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TEXT OF COMMENTARY

KAI RYSSDAL: While it was facilitating the Bear Stearns deal, the Fed also announced a new lending program: It will make money available to 20 other large investment firms, just in case. Commentator and economist Andrew Samwick says we shouldn’t be surprised if the Bear Stearns bailout is just the first in a series.


ANDREW SAMWICK: At the end of last week, JP Morgan agreed to buy the once-mighty Bear Stearns for a pittance of about $200 million in a stock swap. “Buy” here is a euphemism — JP Morgan will assume responsibility for paying Bear Stearns’ debts and take ownership of its hard-to-value assets.

Two questions immediately come to mind: Is this fair, and should we care? The question of fairness is easier to answer — of course it isn’t fair. Bear Stearns’ fall from grace was its own fault. It was the high-wire act in a leverage-soaked financial carnival.

And yet those in the corridors of power have intervened on the perpetrators’ behalf. Some people call this “socialism for the rich.” Even that’s too generous — under socialism, the rich would be paying higher taxes during the boom times. No, “fairness” is not a word that describes this bailout.

So life is unfair… Does that mean we should care? Most people interact with the financial sector in only two ways: as savers and as borrowers. Financial institutions make money by taking either side of those transactions — they’ll hold onto your savings for you, and make you a loan when you need it. Their ability to make loans depends on the value of the assets they purchase. And some of those assets may now depend on JP Morgan.

Right now, the values of most of those assets are falling. Investors are realizing that those assets were previously valued based on unrealistic projections about future income. The Fed has decided that it will try to prop up those asset values through a variety of methods. This is to avoid a tightening of credit to the point where even solid borrowers cannot get loans. That potential borrower may be you.

Of course, one method the Fed is using is lowering short-term interest rates. If you’re a saver, that means even less money each month. So whether you’re a borrower or saver, whether you call it a bailout or a rescue, you should care.

KAI RYSSDAL: Andrew Samwick is a professor of economics at Dartmouth College. In 2003 and 2004 he was the chief economist for the president’s Council of Economic Advisors.

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