Small Enough to Fail

Charles Johnson

Fed Chairman Ben Bernanke announced Sunday night Wall Street’s largest investment banks could borrow directly from the Fed just as commercial banks do now — and use questionable collateral, such as mortgage-backed securities, to boot.

Many critics say the central bank is pledging to rescue Wall Street without demanding an end to excesses that contributed to Monday’s jittery markets, creating amoral hazard that could lead to more excesses.

The Federal Reserve continues to give aid to the irresponsible, said one critic, Peter Morici, business professor at the University of Maryland. Others said the U.S. government seemed much quicker to bail out Wall Street bankers than people who cannot afford their mortgages.

As it moved swiftly Sunday to bring about the sale of Bear Stearns, Wall Street’s fifth-largest investment house, the Fed allowed JPMorgan to use Bear Stearns’ mortgage-backed securities as collateral for some $30 billion in financing.

The central bank also reduced the interest rate on these loans to 3.25 percent and lengthened the payback term from 30 to 90 days.

When reporters asked Treasury Secretary Henry Paulson whether the Fed and the administration seemed more inclined to bail out big banks than Americans facing a home foreclosure, he noted Bear Stearns stockholders are going to lose on their investments.

Bernanke and his colleagues have concluded these Wall Street firms have become too big to fail and so need backup assistance from the Fed when needed, said Naroff.

William Neikirk, Washington Tribune (2008-03-18): Fed likely to stay on offensive: Rate cut expected amid controversy

You, on the other hand… well, sorry, honey, but you’re small enough to fail.

In fact, you’re small enough to get stuck with the bill for government efforts to prop up teetering financial titans.

Barry Bosworth, economist at the Brookings Institution, raised another question: Suppose another Wall Street firm gets into trouble over mortgage-backed securities and no one wants to buy them? Fed intervention might not be enough to save such a firm, he said.

This is a big break with the past, Bosworth said. Their job is to protect the overall economy on the financial side, and they can’t make distinction [between commercial and Wall Street banks] anymore.

Some fear the Federal Reserve might be forced into bailing out troubled firms directly, by buying mortgage-backed securities or assets, rather than offering easy-term loans. But that’s seen only as a last resort.

William Neikirk, Washington Tribune (2008-03-18): Fed likely to stay on offensive: Rate cut expected amid controversy

The lesson to learn here is not, ultimately, that the federal government ought to be bailing out homeowners facing foreclosure instead of (or in addition to) Bear Stearns. It shouldn’t be doing anything of the sort. Government economic intervention is precisely what has caused this crisis, by using its money monopoly to systematically favoring large-scale, consolidated, irresponsible financial firms, and to forcibly smooth out the normal churning and higgling of capital markets for those firms’ benefit, at the expense of working people’s income and cash savings. They do it through the extortion racket that keeps a steady flow of cash to holders of government securities; they also do it through the counterfeiting racket that passes for money in these days, the supply of which a handful of politicians and banking bureaucrats can manipulate at will, so as to suck every last drop of purchasing power out of working people’s wages and cash savings, in order to disgorge it into the dollar-denominated accounts of the kind of people who get big loans of finance capital. Government economic intervention and the money monopoly in particular have been deliberately calibrated to redirect resources and control upwards into the responsible hands of politically-connected investment banks and speculators, and then to send you the bill (either visibly in your taxes or invisibly through inflation) for the massive screwjob that they’ve perpetrated on you. These interventions, which amount to the black ops of the class war, go on because in the explicit ideology of the ruling class, political economy should be rigged to safeguard the interests of the biggest, richest, most entrenched incumbents, no matter how royally they screw up and how recklessly they play with other people’s money, while the rest of us, little folk that we are, are expected to eat the costs of not only our own mistakes, but the bankers’ and politicians’ too, because we are somehow better off being extorted or defrauded in order to ensure that all of us keep on living with our economic fortunes perpetually dependent on the engorgement of these corporate behemoths. Shifting that dependency, in the particular case of home foreclosures, from businessmen to the very politicians who have spent all these years robbing us for the businessmen’s benefit will not help the problem. It will only mean that the businessmen are able to pawn off one more liability on the government, while the rest of us are forced to pay through the nose for a government-structured solution that changes nothing fundamental, and leaves us dependent on the good will of government bureaucrats instead of banking bureaucrats.

And that is the real lesson of this story: the class structure of the State and its economic regimentation. In Anarchy, with freed labor and freed markets, there is another way. A way for working people to be free to take control of their own lives, and to live by their own work, in their own homes, by voluntary mutual aid, and by gifts freely given. In which none of us, no matter how small, will be forcibly corralled into depending, for our security, healthcarehomes, retirements, and livelihoods, on the interests of entrenched bigplayers—neither the economic fortunes of self-aggrandizing robber barons, nor the tender mercies of the political appropriations process. In which we will not be shaken down for extorted charity to cover the gambling debts of predators, parasites, and fools. That way is dumping the bosses off your back—both economically and politically—and the way to move forward on it is to move toward building a vibrant counter-economy, which can feed us while we starve out the monopolists, manipulators, and the rest of those who want to take our money, by force or fraud, so that they can go on living in the style to which they have become accustomed.

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