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Thursday, March 20, 2008

Too Big -- or too Republican -- to Fail?

When even the Wall Street Journal wonders this, you have to wonder what's up with Washington:

It's hard to fashion the sound bite that deflects the inevitable question: Why a "bailout" for Wall Street, and none for homeowners?

David Wessel's column asks some other really good questions, although it's clearly unfair to quote the entire thing:

it's getting harder to see the line that distinguishes banks and other financial entities. A bank takes short-term deposits and lends long term, and is susceptible to runs when depositors get nervous. So the government insures deposits, and the Fed stands ready to lend banks money through its discount window; in return for those perks, the government insists on supervising and regulating banks.

Securities firms, such as Bear Stearns, are supposed to be different. They are regulated, albeit more lightly than banks. But... they couldn't go to the Fed's discount window. Now... we've learned that securities firms today look an awful lot like banks: They, too, are susceptible to runs and, for the good of the system, they can now borrow directly from the Fed.

So comes the inevitable conclusion: Securities firms should be regulated more like banks.
It's hard to resist the suspicion that the people in the Bush administration -- and in government offices of power in general -- find it relatively easy to identify with the plight of large corporations who've made bad bets. They find it relatively harder to identify with people who got in over their heads on their first mortgage. These people have only one home? How sad!

In fairness, it's a difficult issue. Clearly, housing prices have to come down or people who don't own houses now won't be able to buy one. Clearly, when housing prices come down home equity is destroyed. Clearly, there were a lot of stupid people getting mortgages they couldn't afford. How (and WHY??) should we help out these people while letting housing prices go down to lower levels more in line with incomes?

But the same might be said for Bear Stearns. The stockholders get hosed, but most employees will keep their jobs.