Thursday, March 20, 2008

Federal Reserve’s Bailout of Bear Stearns

Hank Paulson, the US Treasury Secretary, defended the Federal Reserve’s decision to rescue Bear Stearns. He said the government would take whatever action was necessary to ensure the stability of the financial system ... even though he recognised the risk of moral hazard.
“You need to balance these two considerations. At this time, given where we are and given how important it is to minimise disruptions in our capital markets and how important it is to protect the economy . . . this was the right decision.”

Mr Paulson declined to say whether the government would be prepared to rescue other investment banks that ran into similar difficulties.

“The government is prepared to do what it takes to maintain the stability of our financial system,” he said. “That’s our priority.”
The people in the highest governmental positions seem to feel that if they don't do something--make something happen--they are not doing their jobs.

Is rescuing a publicly held company that put itself in its position, due to poor business decisions, the role of government? Is this the best use of taxpayers' money ... helping out wealthy investment bankers?

Can we assume that their next action will be the bailout of property speculators and people who bought homes with poor terms and too expensive for their financial situation?
We are halfway down the slippery slope to a full-fledged government rescue for just about everybody with a grievance or a problem that involves a mortgage: banks, lenders, borrowers, the whole crowd.
On a side but related note, investors have increased their bets that other bidders would emerge for Bear Stearns or that JPMorgan Chase would be forced to improve its offer, driving shares in the beleaguered investment bank to nearly three times the price at which JPMorgan agreed to take it over.

No comments: