Question and answer

by on March 14, 2008 at 3:45 pm in Current Affairs | Permalink

What happened to Bear Stearns?

It ran out of money.

Here is much more, via Felix Salmon, and at least you can say that the Sitzkrieg is over and the plot is starting to unfold.  And here’s a picture.

Addendum: "…Bear Stearns, which has a leverage ratio of over 30 to 1, meaning it
borrows more than 30 times the value of its $11 billion equity base."  Here is the link.

1 Wilson March 14, 2008 at 3:58 pm

What is the correct libertarian take on this? It’s bothering me, I’m not sure what is right, I simply don’t know enough. On one hand, corporate welfare is bad on a very simple level. Creates deranged incentive structures, don’t like the government being involved in that sort of thing. On the other hand, the collapse of financial markets is worse. However, the idea that this would collapse the financial markets is based on fallible reasoning. We have to take their word for it. I like this post, but I hunger for more.

2 MikeDC March 14, 2008 at 4:48 pm

I’d be more concerned with having the correct take rather than the correct libertarian take. My 20 second take is the current crisis is exactly the sort of reason I’m a libertarian and not an anarchist. I think there’s a libertarian rationale for the government to exist when entire chunks of the economy have gotten themselves knotted up.

The factors that led into the current crisis are exactly the reasons why I’m a libertarian and not a “mainstream” believer in government. There’s plenty of reason to think that it’s been largely caused by good old-fashioned failure to enforce the laws on the books, creating laws to benefit particular industries and creating perverse incentives to “help” the poor.

Unfortunately we don’t seem to be able to have one function of government without the other.

3 steve March 14, 2008 at 5:12 pm

Im sure this is all a mistake. Kudlow said everything is just fine, the economy is doing great and there is no inflation.

Steve

4 ThaddeusMcMonster March 14, 2008 at 7:19 pm

Part of the problem is that nobody wants to lend money to BS at any interest rate. Even at an absurdly high rate (say 20%), the most you’re going to make on an overnight loan would be a .05% return. The most you can lose is 100%.

Since nobody wants to take on that chance, nobody lends them money, and the fears that BS facing a crisis become a self-fulfilling prophecy. This is the perfect role for the Fed, to play (and note that it’s not playing it alone, JP Morgan is involved as well), certainly as long as BS is only has a liquidity problem, and isn’t insolvency.

5 Petrarca March 14, 2008 at 8:30 pm

Thaddeus, isn’t that relating back to the equity/debt differences, particularly their regulatory treatment? Bear, in a hypothetical universe, could issue very cheap equity in order to gain a capital infusion and, most importantly right now, attract that capital. That would be a first-pass, first-best approach, but it runs into the problems of information costs (how bad is Bear doing, and can it disclose that information to investors while they’re still prospective investors?) creating the classic lemon problem. Throw in the safeguards that other equity holders possess to make sure their shares aren’t diluted, because of the principal-agent problem, and the likeliest market-only alternative is also a non-starter.

6 Grant March 14, 2008 at 9:24 pm

I think its hard to express any sort of “libertarian” take on this issue, because banks don’t operate in a free market, and haven’t for a long time (if ever?). Thus, the banking industry has not evolved in a rational manner where it relies solely on its ability to please its customers to survive; its evolved in a system where the government is expected to bail everyone out if things really go south. Thats not an environment which creates risk-adverse decision making. So while I can see that moving towards a free market would be helpful, it does seem like improvements in “planning” of any socialized industry might yield improvements as well. What makes me wonder about the latter is whether or not congress is likely to pass legislation which is worse or better than what is already on the books.

Wouldn’t it seem like the best thing to do would be to transition to a freer market in times of plenty and not when banks are failing? My person opinion is that the government should never, ever bail any business out under any circumstances unrelated to its “industry” (defense, law and order, etc), but I can see why reasonable people could disagree.

Petrarca, I’m not very familiar with the banking industry, but no serious investor is going to invest in any business without looking at its books. I’d imagine BSC shareholders will disclose whatever is necissary to be able to sell their stock; anything is better than bankruptcy where the shareholder is left with nothing at all. As spencer points out, regulations against bank mergers supposedly (I can’t find the paper now) contributed to the Great Depression, because banks could fail without being bought out by larger ones. I have no idea what sort of similar regulations exist today?

7 Jacob Oost March 15, 2008 at 2:04 am

Heh, I guess I should clarify. While this move by the Fed is probably the best move to make from the options available, it’s not the ideal option. Ideally we’d have a much more free market financial sector.

8 Anonymous March 15, 2008 at 5:23 am

Bear Stearns anagrams from FT Alphaville:

Barren Asset
Rent Bare Ass (no wonder Wall Street hated Spitzer… see? it’s all his fault)

9 James A. Donald March 15, 2008 at 5:54 am

The cure for this crisis is very simple.

Everyone who bet on mortgages without checking the quality of the individual borrowers and houses should lose their shirts.

Everyone who bet on businesses that bet on mortgages without checking the …. Should lose their shirts.

Housing prices should fall until supply and demand are back in balance, then the government should ramp up supply by having a shall issue rule allowing subdivision of land, so that they can fall a lot further.

Mortgages that are for more than the much reduced price of the house should be written down or written off.

10 Jacob Oost March 15, 2008 at 8:47 pm

Shame nobody is talking loudly and often about wholesale deregulation of the financing sector. Why do only extremists like Ron Paul ever talk about stuff that “normal” libertarian types ought to be talking about as well?

11 green May 15, 2009 at 3:08 am

good story

12 yady May 15, 2009 at 3:10 am

Is it realistic?

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