We all know that market correction mechanisms are necessary for a well-functioning economic system. (well maybe I just think that) So I am reasonably sure that the actions that the Federal Reserve took to keep Bear Sterns from filing bankruptcy last week were relevant and necessary. Not only did they make a sound decision in keeping the world's 5th largest investment bank from collapsing in on itself, but I think both the Federal government and Chase will make out like bandits when all the dust has settled. Bear had a net income of over $2 billion in 2006, which is more than what Chase is going to pay for half the company. The Fed is basically acting in their traditional role of "lender of last resort", although this situation is unique because they opened the coffers to work with an investment bank for the first time instead of a traditional bank. Times are changing, and the financial markets evolve. Its hard to keep up with the new derivatives and complex securities that these banks are coming up with to mitigate risk and swap debt products. All of the financial creativity that goes on behind the scenes has allowed companies like Bear and Goldman and Merril to become these behemoth players in the financial system, and the complexity of these products has even more closely tied everyone's success to each other. I am not defending the banks here, if anyone despises the movement away from real economic activity into this imaginary world of fabricated value its me, I am defending the Fed's injunction into the matter. Once the dominoes start to fall, it only gets more difficult to stop the train.
Someone should hand out an extra dose of Viagra and a hooker at the next Fed meeting for doing such a good job.
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The Fed definately made the necessary, although maybe unpalatable, decision to use OUR money for the bail out. But it was not merely a bail out for a bunch of bankers that let greed and misconduct get the better of them; rather, it was a bail out of the entire financial system, thereby also a bailout of our real economy given the catastrophic consequences a financial meltdown would have on your average Joe Sixpacks actual day to day life.
As you mentioned Marco, the financial world has exploded in terms of its complexity. Risk kept on getting 'hedged' away to yet other layers, creating anuncertain and, as we're seeing today, very fragile system.
The problem that the Fed has to confront is that unlike previous crises where the motto was 'too big to fail', now the more appropriate key word is 'too interlinked to fail'. They have the unadmirable task of making decisions in an environment with a disasterous worst-case scenario in which the probabilities are unknowable and could be brought stumbling into a viscious cycle by a mere grain of sand dropped upon this massive derivative castle that have been created within the past decade.
With the fate of not only our financial system, but really the entire global economy resting on their decisions, hookers and viagra seems pretty understandable...
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