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.