Former Congressional Budget Office chief and current NYSE board member Alice Rivlin defended the Fed’s bailout of Bear Stearns in today’s New York Times. Rivlin correctly points out that there was a massive collective interest in forestalling the collapse:
Main Street runs on credit and cannot prosper if the financial system is in shambles and credit dries up. Never mind that the supposed Fat Cat “bailout” was a disaster for Bear Stearns stockholders, and that the idea of a “moral hazard” risk — that other investment banks will be tempted to emulate Bear Stearns — is preposterous. Never mind that if markets head back up and the collateral can be sold at a profit, taxpayers may lose nothing.
In the end, the Fed’s action was not aimed at rescuing those who made bad decisions out of greed or stupidity, but at protecting the rest of the country — and indeed the world — from the possibly devastating consequences of a financial meltdown.
If only she had stopped there.
…we must take on the even harder job of sorting through the explosion of financial instruments … and deciding which belong in our kit of tools and which should be relegated to the waste heap. If they genuinely spread risk and help move capital into more productive uses, they should stay. But some exotic derivatives … may entail more systemic risk than social value.
The folks who devise these exotica are talented enough to create something useful. We would all be better off if they were productively employed in the “real” economy — or pursued wealth in Las Vegas, where the risks the smartest gamblers pose to the house are carefully controlled.
What schlock. If there’s one thing finance doesn’t need, its bureuacrats telling bankers what securites are and aren’t OK. After the LBO and Drexel scandals in the 80s, Rivlin would no doubt have outlawed junk bonds. Today, hundreds of billions of dollars are raised annually in high-yield debt, precisely because the market learned its lesson.
There are some regulatory measures that are defensible, like raising capital requirements, but usually, when it comes to regulation less is more.
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