I was reading an article over at CNN/Fortune by Alan Sloan about the recent “bailout” from the feds. I don’t think I’m quite as angry as Alan about the whole affair, but I think he raises a great point how many people including myself cast bailout of institutions differently than bailouts of individuals or even corporations.

Had the Government stepped in and decided to help the many sub prime borrowers who are on the verge of defaulting on their loans, there would be chorus of protest from the one of end of the political spectrum, and cheers from the the other end. While I’m incredibly sympathetic to the individual plight of homeowners who may lose their home, I do not feel it’s the government’s place to step in when people bet wrong.  I am in general a firm believer that people must reap the consequences of their actions. 

The Fed has effectively come to the rescue of Wall Street by its initial injection of 38 Billion into the banking system, and then subsequently cutting the discount rate, the rate at which the Fed lends banks money, by half a point to 5.75%. While these moves do not target any particular corporation or help any specific hedge fund, the Fed has made a life a little easier for the corporations like Countrywide who are tapping their lines of credit, and the many hedge funds who have had their fill of sub prime secured debt and are now having a hard time finding buyers. The Fed has effectively extended easy money to the distressed. The Fed doesn’t help directly, but through moves that filter themselves easily and widely through the banking system. The last time the Fed stepped in so directly into an impending financial crisis was the collapse of Long Term Capital in 1997.

In general I think these moves by the Fed are good ones. I do believe the Government should have a hand in preventing financial collapse. The Feds actions of the last week are not unlike FDIC insurance. FDIC insurance may seem like benefit to bank customers, but what it really does is help the institution of banking. During the great depression, “bank runs” were common. A bank run occurs when too many bank customers attempt withdraw funds all at once. A Bank Run nearly destroyed George Bailey’s Saving and Loan in It’s a Wonderful Life. The Government set up FDIC insurance in 1933 and bank runs have since ceased to be a major issue as the public has greater confidence in the safety of their funds. The Fed by injecting liquidity into the system by both by buying mortgage backed securities, and making money cheaper is basically trying to prevent something akin to a bank run.

While I applaud these proactive actions, I also find them unfair. Yes, we need to make sure are financial institution continue to work, but these bailouts also reward poor behavior on the part of some hedge funds and corporations who unwisely misjudged risk. In itself it doesn’t bother me that much some people/organization have effectively been given another lease at life. What bothers me is that those at the bottom of the food chain, the ultimate borrowers, gain no direct benefit yet wealthy hedge fund managers and their clients have much to gain (or rather not lose).


In the next couple months we’ll see if the actions by the Feds will be enough to advert disaster for both individual organization and the economy as a whole. In the meantime, I’m make time to read When Genius Failed , the highly rated book covering the collapse of Long Term Capital by Roger Lowenstein.  I’ve been meaning to read the book for the last 2 year, and have been putting it off to reader other fare such as Harry Potter: The Deathly Hallows…