Bear Gets Billions, But What About You?

Wall Street investors couldn't applaud enough last week when the Federal Reserve rode in and rescued investment bank Bear Stearns from bankruptcy.

But now, Main Street wants to know what justifies a taxpayer-backed bailout of the investment bank, especially with no congressional oversight. And, skeptics wonder, why undertake such a plan when it doesn't help the mom-and-pop store struggling down the road or the thousands of Americans who might lose their homes?

Peter Morici, a professor of international business at the University of Maryland, blames Fed chairman Ben Bernanke for not getting more concessions out of the banks. Morici said the banks acted irresponsibly in who they issued loans to, and that the Fed should have forced them to agree to tighter regulations before moving forward with a bailout.

Making a deal, Morici said, "without imposing conditions on the banks for the shoddy ways they have been doing business, is really inappropriate."

Morici said Bernanke had more leverage at his disposal and should have used it to make some real changes to the system.

"He really didn't serve the public interest in that regard," Morici said.

Past Government Bailouts

While rare, the government does come in from time to time and help major companies. The theory, as in the Bear Stearns case, is that there are some companies that are just so large that their bankruptcy would send shock waves through the entire economy.

Late in 1979, President Jimmy Carter and Congress stepped in to save Chrysler from bankruptcy.

Then-Treasury Secretary G. William Miller said at the time that such assistance was "neither desirable nor appropriate, being contrary to the principle of free enterprise."

But Miller said that Chrysler was an unusual exception. In that case, he said the Carter administration "recognizes that there is a public interest in sustaining [Chrysler's] jobs and maintaining a strong and competitive national automotive industry."

After the 9/11 terrorist attacks, the federal government stepped in to help out the airline industry with an aid package. The same argument was made then about the effects upon other segments of the economy if the airlines went under.

Morici said the Bear Stearns bailout is different.

"In both of those cases, there were congressional bailouts," he said. "There was a political process involved and, theoretically, the public interest was represented through that. While here, this was the decision of one or two or three men on behalf of the public … The notion was that something had to be done that weekend."

A Free Market Solution

Peter D. Schiff, president of Euro Pacific Capital, believes that the government does more harm than good and caused the current crisis by lowering interest rates more than the natural flow of businesses called for.

Schiff said the market will always work itself out and that government intervention will lead to larger problems.

"I'm afraid that it is going to create a climate that makes it more likely that these types of bailouts will be offered to homeowners," Schiff said. "It makes it easier for the politicians to say, 'look, how come we can bail out these billionaires or these Wall Street fat cats, but we can't bail out this guy who is losing his home?' It's unfortunate, because it's not going to stop there. So, we should bail out homeowners who borrowed too much money against their homes to take vacations and buy cars?"

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