Wall Street Socialism

The editors of the Wall Street Journal are forever praising the free market – until a crisis hits large investment firms. Then they hem and haw, muttering under their breath about the need for the Federal government to step in to underwrite loans and finance a needed bailout. Hence this remarkable editorial supporting the government’s decision to work in concert with J.P. Morgan to save Bear Stearns from bankruptcy.  

These columns prefer the discipline of the market, but then we don’t know all of the facts that regulators confronted as they looked at Bear’s troubles. Specifically, we don’t know if letting Bear collapse might have had a domino effect on others in the debt and derivative markets.

The Fed and J.P. Morgan are acting in concert to give Bear short-term access to the Fed’s discount lending window that Bear couldn’t access on its own. A big plunger in the debt markets but not a standard commercial bank, Bear’s private sources of funds had dried up. The overriding public interest at the current moment is to maintain a functioning financial system, and regulators clearly felt this was at risk from a Bear failure. Just once we’d like to see what would happen if a big bank did fail, but the current general market panic arguably isn’t the best time to have that experiment. Presumably Bear will now be shopped to private buyers.

This may or may not be wise economic policy. I’ll leave it to the experts to decide on that (Brad DeLong and Paul Krugman have been good guides on these issues). But I never, ever want to be lectured again on the merits of the free market or the need for the poor to pull themselves up by their bootstraps without the demoralizing aid of government funds. Bear Stearns might not be facing receivership anymore, but free market ideology certainly is bankrupt.


4 thoughts on “Wall Street Socialism

  1. More often than not, corporations are allowed to fail in the U.S., more so than in countries like France. Fewer than 10 percent of Fortune 500 companies (in the U.S.) in the fifties are still around today. In France, that number is reversed.

    That said, bank bailouts are occasionally necessary – J.P. Morgan did act (with some unofficial government assistance) to help prevent a market panic in the waning days of the 19th century.

  2. Mark,

    I think the Fortune 500 list is deceptive because in the USA you have many mergers and name changes. It’s not the case that 90% of the Fortune 500 companies of the 1950s have gone bankrupt. A glance at the Fortune 500 list shows that there has been a rise and fall of certain sectors: big steel companies are down, retailers like Walmart have risen. But these economic changes have effected France as much as the United States.

    If one looks at the question of personal economic mobility, you’ll find that the United States is much less likely to see significant changes (the poor rising in wealth, the rich becoming poor) than virtually any other Western country, including Canada, Sweden, and France. See this study (a pdf file): http://www.economicmobility.org/assets/pdfs/EMP%20American%20Dream%20Report.pdf

    And you don’t need to go back to the late 19th century to find examples of the US government bailing out the wealthy. I’d remind you of Chrysler in the late 1970s and the S&L debacle. And there is the whole question of how integrated American capitalism is with military spending.

    Bank bailouts, as you say, may be occasionally “necessary”. If so, we should hear far less cant about the greatness of the free market.

  3. It so easy:
    1 Get really wealthy and powerful.
    2: Take wild risks with your wealth.
    3: Fail.
    4: Get bailed out by the people who make a fraction of what you do.
    5. Learn nothing.
    6. Go to step 2.

    The trick I haven’t figured out yet is step 1. Once I do, I’ll be a part of the American royalty too!

    God bless America.

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