My wise and just editor Harold Meyerson makes a slew of great points on the Big Shitpile today, but I want to zoom in on a particular point, which is that bailouts should have consequences. The Federal Reserve is trying a couple different strategies to try and stabilize the market. But the two most dramatic interventions are 1) extending credit to the 20 largest dealers in securities, the so-called "primary dealers." Previous to this, the Fed had only ever extended credit to heavily regulated commercial banks. And 2) direct bailouts, which is essentially what the Fed did when it shouldered $30 billion of Bear Stearns riskiest securities so JP Morgan could confidently purchase the flailing investment bank. #1 has an obvious corollary -- if the securities dealers are going to get the advantages of banks, they should be regulated like banks. Part of the purpose of that regulation is to ensure transparency and responsible behavior such that taxpayers aren't left holding the bag when bad bets fail to pay off. That's the position we're now in with the securities dealers, but there's no reason we should ever have to be here again. And #2 has an obvious corollary: If we're paying these companies, we should be buying something. As Harold says, "This solution doesn't look to be a great deal for the American public. It looks even worse when we recall that other governments -- including those of China, Abu Dhabi and Kuwait -- have also been bailing out our banks, through sovereign wealth funds, while getting shares in those companies in return. Can't the American people get as good a deal as the Chinese when our government bails out a major American bank?" There's no reason why not. If the banks are in such a state that they need to the Fed to bail them out, they're going to agree to the Fed's terms. And the Fed knows that. But so far, the only group the Federal Reserve has decided to help out was...JP Morgan. They made Bear Stearns agree to JP Morgan's terms, terms that seem ridiculously one-sided even given the uncertain condition of BS's assets. But there's no reason future bailouts can't be leveraged in the interest of taxpayers or the foreclosed.
