Friday, August 17, 2007

Why does Wall Street always get bailed out?

From Yahoo News:

Wall Street loves to talk about letting financial markets weed out the weak. But when the Street itself gets in trouble, it sticks out its little tin cup, asking for help. And gets it.

The subprime-mortgage-market meltdown is a classic example of the way small fry get devoured, but the whales of Wall Street get rescued. Here's the deal: People with crummy credit who took out mortgages are being allowed to fail in record numbers. The mortgage companies that made those loans are being allowed to fail.

Hello? If you believe in markets - which I do - this rescue is especially galling, because Wall Street enabled this mess in the first place. How so? By happily sucking up hundreds of billions of dollars' worth of suspect mortgages from marginal U.S. borrowers-and begging mortgage makers to create more of them. The Street sliced and diced this financial toxic waste into a variety of esoteric securities, making a nice markup when it sold them and generating a continuing stream of profits when it made markets in them.


the shortender said...

Nobody has been bailed out!!!

"Wall Street is Main Street"
The FED's Job is to keep the economy moving.Not bailing anybody out, you have to make sure anybody that committed crimes get the attention and get prosecuted!!!

Idaho_Spud said...


I am of two minds about the Discount Window rate cut.

On one hand the Fed blew a great deal of their credibility. Last week they were talking tough about inflation - this week, not a word. Did this slow-motion train wreck really catch them by surprise? Good Lord, how clueless!

OTOH, the credit markets are dealing with dual crises, both liquidity and insolvency. Much as I would love to see the the worst money-jugglers go down in flames, I think this would have a *terrible* impact on our nation.

Like it or not, our futures (greedy speculators and joe6) are bound together.

That said, this is not really a bailout so much as a 30 day Payday Loan(TM). There is also quite a stigma that goes with taking it, which is why the Fed is encouraging everyone to use it, LOL.

You can be sure of one thing though: Although the Fed won't mention Countrywide by name, that is precisely who is this action is intended to protect. Meanwhile the CEO keeps exercising his stock options :(

Like you, I have a *very* strong distaste for propping up failing businesses. There is huge moral hazard with setting economic policy to protect one company.

FWIW I will be withdrawing all but the minimum balance on Monday... and yes, I have a significant amount of cash that is unencumbered by a HELOC ;)

Bakersfield Bubble said...

I agree no one was bailed out.

The discount window is rarely used by anyone.

This was more of a con(findence) builder for the market.

Unfortunately, the CP market did not move at all. This is where CFC and others are having trouble.

Their CP is costing 10-12%. So the FED offers to trade Subprime crap they cannot offload to the market for a short term loan (30 days) plus interest.

The time for FED intervention was in 2004-2005 with 50 bps raises (not 25 bps) and some serious regulation on the NINA, NINJA, Stated, Liar loans, etc (for the banks).. That is when they needed to step in and we would have avoided most of this mess. Too late now, lets just watch this train wreck....

My point with this is capitalism on the way up and socialism on the way down? What happen to Laissez-faire:

Laissez-faire (IPA: [lɛse fɛr]) is a French phrase meaning "let it be" (literally,"Let do"). From the French diction first used by the 18th century physiocrats as an injunction against government interference with trade, it became used as a synonym for strict free market economics during the early and mid-19th century. It is generally understood to be a doctrine that maintains that private initiative and production are best allowed to roam free, opposing economic interventionism and taxation by the state beyond that which is perceived to be necessary to maintain individual liberty, peace, security, and property rights.[1] Free-market anarchists take the idea to its full length by opposing all taxation.

In the laissez-faire view, the state has no responsibility to engage in intervention to maintain a desired wealth distribution or to create a welfare state to protect people from poverty, instead relying on charity and the market system. Laissez-faire also embodies the notion that a government should not be in the business of granting privileges. As such, advocates of laissez-faire support the idea that the government should not create legal monopolies or use force to damage de facto monopolies. Supporters of laissez-faire also support the notion of free trade on the grounds that the state should not use protectionist measures, such as tariffs and subsidies, in order to curtail trade through national frontiers.

In the early stages of European and American economic theory, laissez-faire economic policy was contrasted with mercantilist economic policy, which had been the dominant system of the United Kingdom, Spain, France and other European countries, during their rise to power.

The term laissez-faire is often used interchangeably with the term "free market". Some use the term laissez-faire to refer to "let do, let pass" attitude for matters outside of economics.

Bakersfield Bubble said...

Idaho_Spud said...


I am not a big believer in laissez-faire. Businessmen and capital markets are no more honest than anything else humans do.

Citizens are (supposedly) watched and protected from the odd criminal by cops.

Businessmen/markets have the potential to harm *way* more people than a group of thugs on the street. Anyone who doubts this need only ask someone who lived through the Great Depression!

Therefore we need cops, regulations, transparency, and credible punishment.

I agree with you about the assymetric application of laissez-faire. Hands off on the way up, and hand holding if things get unpleasant. Will the Fed monetize their screw up, diffusing the bailout onto all of us? Count on it!

Sucks to be us, doesn't it? ;)

Adam said...

Nobody has been bailed out!!!

Maybe you're overlooking the recent activities of the President's Financial Working Group (AKA the Plunge Protection Team), throwing billions of $ into the Market in the past few weeks, all in the name of "bolstering" the market? Anyone who plays the market IS in effect being bailed out, with the costs carried by all taxpayers.

Sure seems like throwing (more) good money after (more) bad. On the bright side, it's not like money doesn't grows on trees (oh, wait: it does, even though the dollar is so weakened by adding additional 'liquidity' that it might be wise to study up on the rapid devaluation of the Marc during the 1930's Weimar Republic, when the German Federal Bank literally fired up the printing presses. This is basically what can be done today by government decree and changes in policy, without needing to print paper money).

But much like Bush's claiming to be a conservative Republican (huh? You cannot co-opt the term, and expect no one to notice the difference!), his claims to being committed to laissez-faire are laughable. The Plunge Protection Team has implemented so many artificial "safety valves" into the market since the team was started in the 1980's (by Pres. Reagan) that the market is as free to operate under it's own inertia as Terry Schiavo was free to breathe, i.e. Wall Street is on life support, and will not be allowed to correct of it's own accord. Just ignore that man behind the curtain, folks....