Monday, March 17, 2008

Life is unfair, and so is the bailout

My commentary on the Bear Stearns bailout aired on NPR's Marketplace this evening. Here's the teaser:

The collapse of Bear Stearns prompted the Fed to once again cut interest rates. Commentator and economist Andrew Samwick says whether you call it a bailout or a rescue, all Americans have a stake in the outcome.
And here's an excerpt:
Two questions immediately come to mind: Is this fair, and should we care? The question of fairness is easier to answer -- of course it isn't fair. Bear Stearns' fall from grace was its own fault. It was the high-wire act in a leverage-soaked financial carnival.

And yet those in the corridors of power have intervened on the perpetrators' behalf. Some people call this "socialism for the rich." Even that's too generous -- under socialism, the rich would be paying higher taxes during the boom times. No, "fairness" is not a word that describes this bailout.

So life is unfair... Does that mean we should care?


Anonymous said...

Profit is privatized and risk is socialized.

The way to win is to be the rich guy or gal who pays less than fair share in taxes AND gets the taxpayer bailouts.

The old saw applies --

When you are a small borrower and you default YOU have a problem. When you are a big borrower and you default the BANK has a problem.

Anonymous said...

I enjoyed the piece on NPR today and did not know it was you until now.

dmandman said...

Do you need a bailout? refi?

Anonymous said...

i don't know that bail out is quite the right word. equity holders at bear stearns lost a lot. debt holders have to be nervous. equity holders at other banks also have to be nervous - deals may be crafted and equity holders may get very little, way less than veteran equity holders imagined possible.

when bernanke and greenspan raised rates (to 5.25%?) and kept them there, the bail out ended for people who borrowed or lended too much in an environment of increasing interest rates.

there is a liquidity distribution problem. people do not now where to put US $s - real estate (declining), bank (negative real rates), education (long-term payoff), uncertain payoff, not liquid), business equity (rising costs and weak demand), other

Anonymous said...

I'm announcing a tender offer on Bear Stearns. $2.01/share, available to the first 100 shares redeemed this way. Cash immediately paid on transfer.

There, now JP Morgan MUST pay more.

Fair Trader said...

I think the "life is not fair" line proves too much. Where does it end.

You could argue:

Of course making blacks sit at the back of the bus is not fair, but life is not fair.

Of course slavery is not fair, but life is not fair.

Of course discriminating against Jews is not fair, but life is not fair.

And so on... The argument that we should not care about fairness because life is not fair doesn't really take one very far. If we were to take that argument seriously, it would be an argument in favor of ignoring all injustices.

Obviously, all things being equal, more fairness is a good thing.

I think the answer to the question "should we care" about fairness is obvious. Yes we should.

Actually, the bailout of Bear Stearns can be justified on fairness grounds. If allowing Bear Stearns to fail caused economic instability that in turned increased unemployment, that wouldn't be very fair to the laid off would it? If allowing Bear Stearns to fail resulted in more credit instability in turn leading more people to lose their homes, that wouldn't be very fair to people who lost their homes, would it?

One way to argue in favor of an unfair action is to point out that not taking that action would be even more unfair, and that we should choose the lesser evil.

But, you shouldn't argue that fairness does not matter at all.

Anonymous said...

watch the movie Good Morning Vietnam - the part where Robin Williams teaches english language to vietnamese people.

Anonymous said...

Couple points:
1. Bear Stearns wasn't bailed out - its gone (for all practical purposes). Bear Stearns employee were certainly not bailed out. Bear was one of those firms where employees held were compensated in and held one of the largest percentages of shares. Many employees did (will) not only loose their jobs but have also lost their live savings.

2. You can argue as you did that 'Bear's fall from grace was its own faults. It was a high wire act in the leverage soaked financial carnival'. Yes and now. Who's fault exactly? Very few individuals were able to understand the risks of many of the mortgage derivatives that led to the demise of Bear and the credit turmoil in general. If you want prove for that just have a look at the Ph.D's trained in the best Econ departments of this country - who found the those securities to be of AAA credit quality ... No, don't blame all, or even most at Bear or any other shop for the credit problems. Very very few highly trained individuals at these firms had enough insight to understand the riskiness of mortgage derivatives valuation assumptions. If you doubt this - sit down - take an actual CDO and try to model up the risk. Have fun!

3. At the end of the day Bear and the mortgage derivatives business is just like any other business, it's mostly trial and error ... if it seems to work you continue until it no longer works. In that sense this business failure is no different from selling ice cream. Unfortunately, so much more is at state in terms of its impact on the total economy, that Fed action was needed here.