What's Next? Biddle? Bailey?

It's been so long since we've had a good bank run that we lack the language to describe how the Bear Stearns collapse translates into our politics.

Bear had weathered the vagaries of the markets for 85 years, surviving the Depression and a dozen recessions only to meet its end in the rapidly unfolding credit crisis now afflicting the American economy.

It was the investment bank most exposed to the credit crisis, but still...

I suppose that if the Republican primary were still competitive, Ron Paul's anti-Fed thundering would have more relevance. But what the heck would happen without the Fed? Think what would will of the Bernanke bailouts.... they're temporarily containing these panics.


This was always the most likely outcome--of the American bulge brackets, JP Morgan has the largest balance sheet and access to the Federal Reserve's discount window. Now that it's happened, we can breathe a sigh of relief that one gigantic disaster has been averted. Libertarians and liberals arguing against the Fed's role in all this sound to me either ignorant or psychotic. The credit markets are already badly malfunctioning (yes, I was wrong). Bear Stearns is the counterparty to a huge number of transactions. Allowing it to fail would have been like throwing a hand grenade into a burning pool of gasoline; bankruptcy proceedings are time-consuming and uncertain. JP Morgan has the ability to assume their risks without any danger of going under themselves; that's very good for the markets, and by extension, us.

Yes, this is creating moral hazard that we'll have to deal with, probably unpleasantly, down the road. But whatever the moral hazard, it is hard to see how it could be worse than the full-blown financial crisis the Fed is trying to avert.

There's an argument, of course, that successive Fed interventions, starting with the Russian bond crisis, have turned bankers into ever-greater risk takers, making each crisis bigger and more expensive than the last. The thinking goes that we need to draw the line here, whatever the cost, because if we let the financiers go on their merry way, eventually they'll create a wave that will swamp the Fed's power to intervene. Possibly so, but from what I hear, the people on Wall Street are pretty much scared right down to the tips of their Gordon Gekko underoos.