Bail out Blues

Note to self: do not turn on acerbic talk radio program after leaving a relaxing acupuncture appointment. I wish I knew that before I got into my car last night and tuned into hear a local host ask her listeners: “How do you feel about your tax dollars being used to bail out fat cats on Wall Street?” Almost immediately, I tensed up and felt my blood boil.

I know that talk radio is a bastion for vitriol, but I am getting sick and tired of hearing the Bear Stearns story being framed as taxpayer-financed bail out, as if we had nothing to lose by allowing Bear Stearns to fail. What seems ridiculous is that many of the hosts who are throwing out these types of remarks have absolutely no idea what they are talking about. (I looked up the biography of the host in question and found that her primary career has been as journalist, covering “murder, mayhem and the Mafia for nearly ten years.” While she may have been a capable writer about these topics, it seems almost irresponsible for her to spew opinions without fully understanding the layers of this financial crisis.)

Like most news stories, this one is nuanced and deep, two concepts that normally evade sharp-tongued folks who flood the airwaves. Yes, on the surface you could say that the Federal Reserve helped to save Bear Stearns by assuming $29 billion of hard-to-price securities (in essence, putting billions of dollars of taxpayer money at risk) in order to facilitate the purchase of Bear by J.P. Morgan. You could also argue that due to the interconnected global financial markets, the failure of Bear Stearns would have likely had far-reaching ramifications, some of which the radio host and her listeners may not have liked too much.

One outcome of the democratization of investing is that “the fat cats of Wall Street” now include the vast majority of US employees. Most people own financial assets, either directly or through retirement/pension plans. So let me ask you fat cats how you would have felt if on March 17th you woke to news not of a Bear Stearns bailout, but of its bankruptcy? My guess is that US stocks would have plunged on the news—given the mood on the street the previous week, a Bear bankruptcy could have driven down the Dow Jones Industrial Average by 10%--about 1,000 points.

Some hard core free-market fundamentalists believe that this type of purge would have been the quickest way to get to true “price discovery”. Of course that kind of purge could also have led to a domino effect infecting other financial institutions and miring the US economy into a deep and painful recession. That does not seem like an appealing alternative, does it?

One point that should be raised is that the democratization of investing may necessitate expanded Federal oversight. Once the Fed began to lend directly to investment banks instead of to their normal customers (commercial banks), the central bank made that outcome a fait accompli. I am sure that the radio host will frame this as another example of “government getting into your business,” but perhaps you will see through that kind of rhetoric to understand that there is always more to the story than the simple sound bite.