[Edited by Temujin… we do not want personal attacks in the posts, especially against other ALS bloggers. Keep the discussion to the issues.]
There has been a great deal of discussion of the US financial bail-outs recently. Neither the Fed nor the US Treasury have created any sort of moral Hazard up to this point in time in dealing with the crisis.
1. Bear Stearns.
Shareholders were rolled getting a fraction of what their stock was worth. The first instructions from the US authorities was that JP Morgan pay no more than two bucks a share. This was later raised to 10 bucks by JP Morgan as they realized the original price was far too low.
2. Fred and Fannie.
These two institutions always operated in the market with the understanding that the US government provided an implicit guarantee. The securities they offered traded only a few basis points above treasuries because of that underlying covert guarantee. The government and the electors had decades to remove the guarantee. However seeing both groups benefited from these monstrosities through cheaper mortgages, political donations and other skulduggery there was no desire to remove the guarantee. As there was no way the government could walk away from these monsters without committing a dishonest act they were obliged to effectively nationalize them. Meanwhile the shareholders were screwed.
AIG was a nationalization. The stockholders got rooted and the creditors rank below the Fed on the liquidation. If anyone thinks creditors are getting looked after I suggest you buy their bonds and stand in line.
4. The proposed Resolution Trust type set up.
This is a trade off. Either the government buys the toxic waste sitting on the bank balance sheets and start lending again or the US and possibly the world goes into depression.
If we want to avoid these problems in the future (Good summary by Mark Hill)
1. don’t run an inflationary monetary policy
2. Don’t run lax anti-discrimation lending practices
3. Remove implicit guarantees.
And by the way, Ben Bernanke and Treasury Sec. Paulson have done a masterly job of trying to fight this crisis. The problem we have is interest rate targeting, it has not been the way these two fine public servants have conducted themselves during the crisis.
Although Ron Paul offers some good ideas, I disagree with the Paulite attempts to blame the Federal Reserve for many of the financial problems of the world. The Fed is a fine institution. There are problems with the way it runs monetary policy but that is a problem shared by every major central bank in the world.