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Will taxpayers pay for Bear bailout?

Bob Moon Mar 17, 2008

Will taxpayers pay for Bear bailout?

Bob Moon Mar 17, 2008


Kai Ryssdal: The average investor couldn’t get in on that $2-a-share price for Bear Stearns, as I mentioned — but that doesn’t mean we all might not own a piece of it, eventually. The Federal Reserve has committed $30 billion in taxpayer money to guarantee the riskiest part of Bear’s portfolio. Which is how it convinced JP Morgan to play along.

It might all work out fine in the end, if those assets don’t collapse. Then again, it might not. Marketplace’s Bob Moon’s been covering the bailout part of this story for us — hi, Bob.

Bob Moon: Hello, Kai.

Ryssdal: I wanted to pick up on the bailout part of the equation here. Bear Stearns is a private company, the Federal Reserve is not — why is taxpayer money going to this cause?

Moon: Well, there are those who say that an action like this really just puts off the inevitable. They are against the idea of the Fed intervening here. They say these tens of billions of dollars in bad loans that all these banks are holding are going to have to be purged one way or the other. And we can either do it now and get it over with, or prolong the inevitable. They say the Fed is shifting the risk of this bad debt actually on to the shoulders of the American taxpayer — and in the process it’s destroying the value of the dollar. And that could fuel inflation down the road. But then you’ve got the prevailing opinion today, and that seems to be that in this case the Fed really had no choice, because Bear Stearns has been a vital engine, if you will, for so much investment activity today around the globe. I spoke today with investment manager and financial writer John Mauldin, and he sees this in very stark terms.

John Mauldin: Allowing Bear Stearns to collapse would have been an end-of-the-world catastrophic event — it would have made Black Monday in 1987 look like a walk in the park. It’s just hard to let people understand how dire it would have been. The Fed had to step in.

Ryssdal: Those are big bad words, Bob — catastrophic event, Black Monday, end of the world… Is it really that bad, though?

Moon: Well, Mauldin actually went so far as bringing up the Great Depression. I think that’s been kind of whispered for some time now. You know, if you look back at what led up to that disaster, there was a push back then to let insolvent institutions go bankrupt. And there were arguments that was the only way to purge the economy of its bad debts back then. Mauldin argues that when you think of this in that light, we’ve all got an interest in what happens with Bear Stearns.

Mauldin: This isn’t a bailout, this is the Fed plugging a leak in a boat that we are all in.

Ryssdal: All right, but wait: One of the hallmarks of this credit squeeze has been that we don’t know what we don’t know. So the question has to be, how many holes are there to be plugged, and does the Feb have enough money?

Moon: I suppose you could say that you can print all the money you want if you’re the Federal Reserve, right? Critics say every time it does that now, though, all of the dollars we’ve got in our wallets and our bank accounts are worth that much less. Other people are arguing that even throwing money at the problem was necessary in this case to save Bear Stearns, it still doesn’t get at the underlying problem — there’s a growing chorus that this isn’t so much a problem with credit not being freely available as much as it is general fear over how safe the banks really are. And economist Peter Morici at the University of Maryland told me today that’s what the Fed needs to start focusing on.

Peter Morici: The real issue here is, did the Fed accomplish anything by bailing out Bear Stearns. And the answer is no. Could it have accomplished something. Yes, by imposing conditions on the way JP Morgan and other banks behave. That’s the reason we’re in this mess, and the reason we can’t get out.

Moon: And Kai, that’s why many investors are still skittish about which domino might be the next to fall.

Ryssdal: Does the Fed know something we don’t?

Moon: Well, just today there were rumors — one of them was actually published on the Web site of The Wall Street Journal — that a bank in Asia has asked traders not to enter into new transactions with Lehman Brothers. That prompted Lehman to say that its liquidity position remains strong… Sound familiar?

Ryssdal: Which is was Bear Stearns said last week.

Moon: There’s an old axiom on Wall Street, Kai, that the moment an institutions finds itself trying to convince others that its credit is good, that’s the time it’s perceived not to be.

Ryssdal: Yeah, right — the check is in the mail. Marketplace’s Bob Moon — thank you, Bob.

Moon:Thanks, Kai.

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