Bleakonomics

[flashl]

The Way We Live Now

Since the bank runs of the 1930s, federal protection of retail depositor institutions has been a hallmark of American capitalism. The Federal Reserve, in a sweeping extension, has now extended the privilege to gilt-edged investment firms.

What is the true value of Bear Stearns? If the government-orchestrated takeover of Bear goes through as planned, we will never know. As with Bear, so with the billions of dollars of mortgage securities for which the central bank has suddenly become an eager customer. So, too, perhaps, with the nation’s stock of residential homes — the prices of which, instead of reverting to more realistic values, will get a boost from the Fed’s repeated rounds of interest rate-cutting.

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Capitalism isn’t supposed to work like this, and before the advent of modern finance, it usually didn’t. Market values fluctuate, but — in the absence of fraud — billion-dollar companies do not evaporate. Yet it’s worth noting that Lehman Brothers’ stock also fell by half and then recovered within a 24-hour span. Once, investors could get a read on financial firms’ assets and risks from their balance sheets; those days are history.

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Government rescues are as old as private enterprise itself, but we are well beyond the days of guaranteeing loans to stodgy manufacturers à la Chrysler and Lockheed. Those cases were contained; the borders of finance are more nebulous. However pure of motive, Bernanke & Co. are underwriting overleveraged markets whose linkages, even today, are dimly understood. The formula of laissez faire in advance and intervention in the aftermath has it exactly wrong. Better that the Fed, with Congress’s help if need be, ensures that regulators and markets have the tools to know what companies are worth before the trouble hits.

NY Times