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| Mon Jun 30 23:18:26 2008 Seizing up again |
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| Mon Jun 30 23:18:26 2008 Seizing up again The Fed confirms what I already said... |
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| Friday there was a
Yahoo story about the
Federal Reserve's moves to shore up Bear Stearns.
If you read Seizing Up Explained then you already know the story: the Fed felt it had to move because the entire investment banking industry was on the verge of collapse. The article was based on recently-released documents "providing insights into its private deliberations." The documents pull no punches, saying they feared an "immediate failure" of Bear Stearns, and such an event would cause an "expected contagion." I thought the "documents" were minutes of the meeting. They weren't, at least not verbatim. The Yahoo story didn't reference them, but I found the minutes on the Federal Reserve website. I was hoping (naively) for transcripts of the discussions. Instead, these are just bullet summaries, written after the fact (the documents reference other events that happened on April 1, for instance). So the "minutes" had the benefit of being written with considerable hindsight. My take on these? They are intended to support the Federal Reserve's decision to bail out Bear Stearns, and don't provide much insight into the decision making at the time. I don't think the Federal Reserve's documents are propaganda, but they have to be questioned. On the one hand, you can see that Reserve members were worried about a general collapse. On the other hand, a cynic could wonder if they were going out of their way to help a few investment banks that didn't deserve to be saved, and they are still trying to defend that decision. It is very clear that the entire banking system was not primed to collapse. There were a number of investment banks who were vulnerable, but any banks in that position deserved to fail. If a general "contagion" really developed, the worst that could happen is that investment banks would have a run on their funds. Don't get me wrong, that's pretty bad, but it would remind those who invested money there that those banks are not guaranteed. Of course, it is possible that by allowing commercial and investment banks to merge, the US has created a situation where instabilities in (poorly regulated) investment banks can jeopardize our (taxpayer-guaranteed) commercial banks. If that is true, then the solution is to force commercial and investment banks to stay separate, not to guarantee investment banks. If we've leared anything from the subprime mortgage mess, it's that investment banks are fraught with risk. After all, that's the path to higher returns. The solution is to make sure investors understand the risks, rather than pretend we can control them. Comments |
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