The Bear Stearns Catastrophe: Not Your Father's Free Market

Gentle Readers,

As a recent investor in Bear Stearns, whose foray into leveraged bond funds backed by subprime mortgages has turned into disaster, you'd think I'd be delighted with the US government's 30 billion dollar bail out that took the form of a credit line to entice JP Morgan to pick up the pieces. The pieces came at two bucks a share.

You, Gentle Reader, might wonder why TWC made such an idiotic decision. After all, investing in Bear Stearns seems sheer folly. Here's the strategy: Your government made my investment decision for me without asking. We taxpayers are on the hook and there will be absolutely no return on investment for any of us.

The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation's fifth-largest investment bank into trouble.

Smells like corporate welfare to me.

And here's your Econ 101 lesson for the day:

In a free market economy those who make bad economic decisions fail. They go broke, they go out of business, they lose their money, they lose their retirement, they don't get to go to Jamaica on vacay and the MBZ goes back to the bank. Failure and correction is what keeps a market economy on a relatively even keel.

A THIRTY BILLION DOLLAR bail out is NOT capitalism. It is NOT the free market. It is government intervention in the market place that benefits a proportionally few investors and stockholders who voluntarily took a huge financial risk because the promised return was tantalizing. To be charitable, they bet against the come and lost.

As the Old Man used to say, Tough Bounce.

As Ever,

TWC

Comments

[Kos]

Wouldn't you know it, I finally took possession of some commodity metal left to me by dear old dad, on March 18th -- the Tuesday after the weekend panic action that the Fed took to bail out Bear Stearns, which had the effect of pumping up the stock markets and sending commodity prices into a tailspin. It happened so fast that I had no chance to sell any before the price dropped 10%. This coming week will be a very nervous time for Kos, I can assure you.

The thing is, this was truly a panic move, and the Fed lovers are saying Bernanke did the exact right thing and may have saved us from a complete meltdown of the financial markets. I say he did nothing more than pump more air back into a bubble that desperately needs to deflate. And he did so in part to save his fat cat friends at Bear Sterns and the other Wall Street firms that had just doled out billions in bonuses (!) to their top executives as a reward for their stellar performance that led us to the precipice.

Well, the writing is on the wall and it says that it won't work, that the US is spending itself into oblivion, and this panic move will delay the immediate slide but hasten the ultimate fall. Time will tell if I'm right. I think we'll know by summer.

Kos

[TWC]

Not to mention the millions in incentive bonuses to Bear Stearns people to reward them for sticking around after the buy-out.