Call it what you will. Present it in new-wave, financial terms. Whether it be subprime loans, auction credit swaps or some other fancy derivative conceived, Wall Street has again played by its own rules.
No matter how you slice the Federal Reserve's intervention into keeping financial giant Bear Stearns afloat, it is a bailout. Competing against the core foundations of a capitalist system, this recent financial travesty sheds light on some troubling concerns that Wall Street adheres to a different set of standards.
Let Bear Stearns fail in the market system, just like all the other venture capital busts, the local restaurants and any other company or corporation that may go belly-up. But why not salvage our airline industry - or, better yet, some startup biotech firms that are on the fringes of eliminating some once-thought-to-be-incurable diseases.
The recent pleas and justifications to Congress by all the parties involved that Bear Stearns' bailout (my term, not theirs) was to avert a severe financial domino effect to the world's markets is full of speculation, panic, weak and non-specific conjecture - an anti-capitalist attempt to protect their own poor leadership. If our capitalist society wishes to prevail and be the trusted and vaunted symbol of the economic free world, financial institutions must be allowed to fail just like all other businesses.
When Wall Street comes to represent the titans of capitalism, it all dissolves when the mantras of natural selection and survival of the fittest creep into their own backyard. Bear Stearns' clients and customers would have easily been picked up by the circling vultures in lower Manhattan. As one hedge fund manager so keenly commented, "Wall Street does not allow economic cycles" to occur. Economic cycles are the necessary evils of a free market system.
The only losers in the fallout are Bear Stearns' employees, customers and shareholders. These days, the folks at Enron do not feel so lonely. The victors are the investing public and the free-market system. A collapsed Bear Stearns would make headlines for a few short days and the resurrection would begin as soon as Bear's clients, customers and employees could be contacted by their Wall Street rivals.
The unwillingness of the Federal Reserve Bank (as well as its flagship bank, the Federal Reserve Bank of New York), to allow the capitalist system to function as properly designed shows a complete lack of institutional and professional confidence. Not allowing failures to occur in a capitalist system illuminates a rigged game in which short-sighted alarmists and uncontrolled derivative creators run rampant. Wall Street has once again immersed itself into a shadowy atmosphere where massive leverage bets are made, failed and covered.
The Fed is afraid to allow the economic cycles - which it so proudly dissects and evaluates at great lengths - to actually take place. In our interconnected global economy, transparency and simple capitalistic competition must be allowed. Competing with leverage-based derivatives calculated in scientific financial laboratories will only shine for a short while in a true capitalistic environment. Eventually, the gimmick derivatives implode and economic chaos ensues.
Allowing a bailout for Bear Stearns (and other public financial firms with transactions that took place off their balance sheet, thus unbeknownst to regulators and the public) is like bailing out McDonald's - not for a severe shortage of hamburger sales, but because the top executives were misusing corporate funds to make $1 million bets in Las Vegas on every March Madness tournament game. Allowing McDonald's to fail could very well upend the lifestyles of many more Americans than a failed and fractured Bear Stearns.
Not allowing failures to occur in a capitalist system creates a double-standard game that does extreme damage to the long-term psyche of a distrusting public. This is far more dangerous than a month of readjustment and resurrection on the streets of Manhattan.
Bear Stearns and other investment banks exposed themselves in a gigantic game of leverage and greed. This time - unlike the massive bailouts of the Long-Term Capital hedge fund disaster of the 1990s and the savings and loan debacle of the 1980s - capitalism should somehow come out a victor, not a loser.
Let them, not us, suffer the consequences of their behavior.
Timothy Stratford is a lecturer in the Experimental College.
