Does Bear Stearns Bailout Set a Bad Precedent? By orchestrating the survival of Bear Stearns and subsidizing its marriage with JPMorgan Chase, the Federal Reserve and the Treasury Department have removed some of the loss from the profit and loss system. But without the potential for loss, is reckless risk-taking more likely?
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Does Bear Stearns Bailout Set a Bad Precedent?

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Does Bear Stearns Bailout Set a Bad Precedent?

Does Bear Stearns Bailout Set a Bad Precedent?

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ROBERT SIEGEL, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

U.S. home prices fell more than 11 percent in January, according to new figures out today. That's bad news for homeowners, of course. Lawmakers, including the presidential candidates, are floating suggestions for ways the government might help people who could now face foreclosure.

But commentator Russell Roberts says it's dangerous when the government steps in to make hard times easier. His case in point: The Fed's role in mediating the sale last week of Bear Sterns.

Professor RUSSELL ROBERTS (Economist, George Mason University): Wall Street is all about profit, all about the bottom line. And profit does play a major role in making our world go round. Without profit, there's no point in taking risks. Without risk-taking, there's no investment. Without investment, there's no growth. Profits are the cornerstone of our economy and our way of life.

But as Milton Friedman liked to point out, our economic system isn't just based on profit. It's a profit and loss system. It's the combination that sustains and enhances our standard of living. Yes, the potential for profit encourages people to take risks. But without the potential for loss, you have reckless risk-taking. You have risk-taking without prudence. Without the potential for loss, irresponsibility goes unpunished.

The Federal Reserve and the Treasury Department have orchestrated the rescue of Bear Sterns. The defenders of the maneuver argue that if Bear Sterns had failed, it would have created a lot of collateral damage, so much collateral damage that you and I, normal folk, who don't know anything about highfalutin financial instruments, like collateralized debt obligations, would have been hurt as well. If Bear Sterns have gone bankrupt, Lehman Brothers might have been next. Some say that if Bear Sterns had failed, the entire banking system was at risk. Maybe.

It's seems awfully hard to know for sure. But what I do know for sure is that by subsidizing the marriage of Bear Sterns and JP Morgan, the government has removed some of the loss from the profit and loss system. Oh, they tried to make Bear Sterns suffer by demanding a price of $2 a share. But now the deal's been renegotiated - ta-da - to $10 a share, a mere five-fold readjustment. What's going on here?

What's going on here is that we're in uncharted territory, a world where the Fed and the Treasury are making up the rules as they go along, where accountability is being ignored and a world where the government bails out Bear Sterns and its creditors rather than letting those who have been reckless learn a lesson for the next time.

Yes, letting Bear Sterns go under would have been dangerous. But helping JP Morgan devour Bear Sterns is dangerous, too. Where does the government stop in protecting people from irresponsibility? Homeowners and lenders are next. The political pressure is inexorable for some sort of bailout. And then comes more regulation of investment banks.

In a world where people who make bad decisions are spared the full consequences, only one thing is certain: We've encouraged more people to make bad decisions in the future. The real price to be paid isn't the dollar costs of any bailout but the encouragement of recklessness and irresponsibility. That will make all of us poorer down the road.

SIEGEL: Russell Roberts is a professor at George Mason University and a research fellow at Stanford University's Hoover Institution.

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