Friday, March 21, 2008

Bear Stearns: privatized gains, socialized risks

The Bush administration and federal regulators are largely to blame for the nation's growing financial crisis. Their laissez faire practices fostered the housing bubble, putting people in homes they couldn't afford and allowed financial speculators to mask the risk by slicing and dicing loans to the point that they could no longer keep track of them while earning billions.

Alan Greenspan and other high-ranking Federal Reserve officials watched as the bubble inflated, or worse, blew more air into it by encouraging "innovative" lending schemes.

Once the housing bubble blew-up, the Bush administration has refused to help homeowners who, having been enticed into taking out loans they could not afford, are now facing foreclosure.

The President justified federal inaction less than a week before the Fed bailed our Bear Stearns, asserting that "one of the worst things you can do is overcorrect." Resurrecting Republican arguments against raising the federal minimum wage, he said that federal intervention "would make a complicated problem even worse - and end up hurting far more homeowners than we help."

The administration didn't harbor the same concerns about a federal rescue of the nation's financial elite, guaranteeing $30 billion for J.P. Morgan Chase' s firesale purchase of Bear Stearns, one of the industry's most aggressive and reckless investment firms.

A New York Times editorial, "Socialized Compensation," notes that: "The ongoing bailout of the financial system by the Federal Reserve underscores the extent to which financial barons socialize the costs of private bets gone bad.

Compared to the cold shoulder given to struggling homeowners, the cash and attention lavished by the government on the nation’s financial titans provides telling insight into the priorities of the Bush administration. It’s not simply a matter of fairness, though...if the objective is to encourage prudent banking and keep Wall Street’s wizards from periodically driving financial markets over the cliff, it is imperative to devise a remuneration system for bankers that puts more of their skin in the game.

The costs of such a lopsided system of incentives are by now clear. Better regulation of mortgage markets would help avoid repeating current excesses. But more fundamental correctives are needed to curb financiers’ appetite for walking a tightrope...

...until bankers face a real risk of losing their shirts, they will continue blithely ratcheting up the risks to collect the rewards while letting the rest of us carry the bag when their punts go bad.

The editorial is linked here.

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