All these philosophical discussions on our air this morning about whether it is appropriate for the Congress, or the President, or the Fed to step in and "bail out" homeowners or risk takers misses the point. In theory, of course they should not bail out anyone.
But we do not work in the world of theory. The Street believes that election concerns now override the moral hazard issues, that actions being taken now will to some extent mitigate the subprime and liquidity crisis.
And what if it doesn't mitigate the crisis? Listen to Bernanke this morning: "The Committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets."
In other words, if the current bag of tricks does not work, they will take more tricks out of the bag. This is a moving target, and the Congress, the President, and the Fed are going to move along with it if they have to.
What about that argument that you can't bail out risk takers? Here's what will really happen: if a bunch of mortgage companies and (say) a half million people lose their homes as a result of this and the economy goes chugging along just fine, no one will do anything more to help them out. But if those developments result in a series of cascading effects that again seizes up credit or shows signs of tanking the economy, then they will act again. AND if, as an unintended consequence, a few mortgage companies do get propped up, then so be it.
Arguments that the proposals made are marginal or only help a few also miss the point, for the reasons I cited above. The participants in this game have clearly signaled they will act more aggressively if things deteriorate--whether it involves lowering the discount rate, cutting the Fed Funds rate, or holding midnight sessions of Congress and passing emergency legislation by candlelight.
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