Where’s the outrage? That’s the question I kept asking as I heard that the Federal Reserve Bank had bailed out Bear Stearns by offering to take on $30 billion of its riskiest assets so JP Morgan could buy the rest of the firm on a “fire sale.” Bear Stearns was known on Wall Street for being a “survival of the fittest” type place where highly levered hedge funds gambled with the money of wealthy investors. And now that the gamblers have gone broke, the Federal government is bailing them out. Yes, that’s the same federal government too concerned with fiscal prudence to fund the S-CHIP program that insures kids have health care.
As taxpayers, you and I are literally paying the over-stretched salaries of Wall Streeters. Here’s how this works. Every time, a Wall Street firm makes an investment, they take a salary and pay their investors based on the difference between the expected value of the asset they take on and the value they paid. Over the last few years, these firms have been wildly overvaluing the worth of mortgage-backed securities. They took large bonuses on these over-sized valuations. Now, that the real value is turning out to be much less than expected, the Federal Reserve is taking on these assets by printing U.S. dollars to cover them, literally devaluing the greenbacks you and I have in our wallets to fund the past bonuses of wealthy executives.
I understand the argument that this bail-out was necessary in this single case to help insure we don’t have a much broader liquidity crisis. I’m even willing to go along that the Fed made the right move in this particular case in authorizing the bailout. But at the least, the Fed should be making a clear statement along with its generous gift of money that our country needs regulations in place in the future so this kind of extreme leverage does not happen again. And the Fed should be making clear it is not going to be there for investment banks in the future so they should watch their balance sheets more closely. Unfortunately, the Fed made the bail out without even a statement on the grotesque unfairness of what is taking place and without a statement that this should not happen again.
All this, of course, is two more blows to America’s economic security. First, our sinking dollar only further undermines our economic might in the world. Our economy’s ability to compete with the EU and China has been hit hard – just compare our dollar to the Euro. And, second, our country’s unfairness and continuing divide between rich and poor undermines the social fabric that makes this country so great, so proud and so free. Americans say overwhelmingly today that they’re unhappy with the direction this country is headed. It is easy to see why.