Comments on: Roubini on the Bear Stearns Bailout

By: Chris Kinnan

Chris Kinnan — Thu, 20 Mar 2008 17:11:21 +0000

Agreed. The lending industry is in a bit of a catch 22– if they have rigorous lending standards they are “redlining” and if they loosen standards its “predatory.” Clearly both borrower and lender abused the system, in no small part because of the government’s role in subsidizing risk through the GSE’s and the tax code. The LTCM bailout also created moral hazard and helped expand hedge fund recklessness. The ratings industry (Moody’s etc) also clearly dropped the ball and needs more competition as well. Still, the best way forward is to let the market reprice things, in both housing and debt markets. Postponing the day of reckoning with more easy credit– as the fed is now doing– will only make it worse, since this is a solvency problem and not a liquidity problem.

By: Sickle

Sickle — Thu, 20 Mar 2008 16:54:11 +0000

Awesome post, Chris. There’s a liberal blogger named atrios who has been out-in-front on this, not so much on the idea side but he was warning years ago about the lending standards that led to the current crisis. He wrote today:

As some of us have been trying to explain for a long time, “subprime” was a category of borrower, and ARMs and other types of “exotic” mortgages were loan types. While in some areas subprime borrowers were probably more vulnerable to predatory loan tactics, this has never been a “subprime” problem. If I had to describe simply if imperfectly what the problem was, I’d say it was a lax lending standards problem. Years ago I said these stupid loan terms were a bad idea, but I had no idea then that not only were stupid loans being given out but that they were being given out to people who had no hope of repaying them.

By: Thomas Keeley

Thomas Keeley — Thu, 20 Mar 2008 13:55:46 +0000

It seems that Bernanke is under the mentality that these short-term solutions will solve all of our problems. However, it seems that they will just create more market volatility and give investors a great sense of uncertainty.

This is great if you are a day trader, but if you are a typical long term investor it seems that Bernanke is only going to make the market more nerve wrecking by not addressing the more major problems.

What would have happened had Bear Stearns continued down the path they were going on without intervention? They would have gone into bankruptcy. So what. Let the market handle itself.

At least if Bear Stearns did go bankrupt, maybe these other banks would take a moment to reevaluate their lending procedures and implement a standard where they only give money to those who they are confident will be able to pay them back. If I were a shareholder of any major lending institution, this would seem like a commonsense demand of the Board I help elect.

While a Bear Stearns bankruptcy would have definitely sent some waves through the markets, at least in the end there would have been a lesson, other than confirming that short-term interventions usually don’t work.