On this week’s podcast, the Prof and I talked ab it about Bear Sterns, but I don’t think either of us really saw the massive write-down that came this morning. Here, via Atrios, is a key distinction when it comes to bailouts:
The Fed has no idea of which other primary dealers may be insolvent as it does not supervise and regulate those primary dealers that are not banks. But it is treating this crisis – the most severe financial crisis in the US since the Great Depression – as if it was purely a liquidity crisis. By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbate moral hazard distortions. Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts. This is a most radical action and a signal of how severe the crisis of the banking system and non-bank shadow financial system is.
It’s one thing to bail out banks. That’s why we have the Fed — to bail out banks. It’s a whole ‘nother bag o’ potatoes to bail out other organizations that pretend to be banks but aren’t regulated as such.
This is a golden opportunity for Democrats to regulate the hell out of these non-bank banks. Will they take it? If not, is there some overzealous NY State Attorney General interested in grandstanding on the issue? Oh… wait.