In free market capitalism, especially in an event with the magnitude of Bear Stearns’s collapse, there are losers and believe it or not, there are even some winners.
“[S]o, the free market didn’t work here,” ABC correspondent Terry Moran said on the “World News” March 17 in a report on the downfall of Bear (NYSE: BSC). “Government did. And the question now is: will it be enough?”
The assumption that “government” worked and the free market failed is based on the Federal Reserve’s intervention meant to keep the beleaguered investment bank from completely going under, facilitating a takeover by J.P. Morgan Chase (NYSE: JPM).
Moran’s declaration of a free market failure differs from an earlier – and more accurate – statement in his report – that there are winners and losers in free market capitalism.
“Bear Stearns was an aggressive Wall Street buccaneer that took big risks for big payoffs,” Moran said. “And the gospel of Wall Street, the gospel that’s always preached to the rest of America is that free markets rule. Winners win, losers lose.”
And there were winners and losers in the collapse of Bear Stearns, as Treasury Secretary Henry Paulson pointed out on NBC’s March 18 “Today.” On Jan. 17, 2007, Bear was trading at its high of $171.51 a share. At the close of the trading session on March 17, Bear Stearns was trading at $4.81 cents a share – just pennies on the dollar from its all-time high.
“[F]irst of all, let me say that the Bear Stearns situation has been very painful for the Bear Stearns shareholders,” Paulson said. “So I don’t think that they think that they’ve been bailed out here.”
In short, the free market did work as it’s expected to work. Bear Stearns took risks in an attempt to succeed, but ended up losing.
“But analysts said Monday they expect 15,000 to 30,000 more job losses by the end of the year in the financial sector, including half of Bear Stearns’ 14,000 workers following JPMorgan Chase’s impending takeover of the company,” Aaron Smith, CNNMoney.com staff writer, wrote.
And the free market winner of this? Some look at J.P. Morgan for getting Bear at a discounted price of $2.00 a share.
“JPMorgan, with the Fed assuring it against losses at Bear Stearns, was a winner yesterday, rising $3.77 to $40.31 and leading the Dow Jones Industrial Average to a gain of 0.2 percent,” David Pauly, a columnist for Bloomberg, wrote on March 18.
Moran raised one important concern in his report about the Fed’s action – would this type of intervention by the government enable a similar situation to occur again?
“The problem many economists and investors worry about is called ‘moral hazard,’” Moran said. “When the government protects investors from the full consequences of bad or even reckless decisions, it just encourages more recklessness in the future.”
However, government intervention in other economic matters, such as the housing crisis, has received support from the media. CBS’s Maggie Rodriguez asked Paulson on the March 18 “The Early Show” if there was the possibility of a “cram session” to find a way to bail out some homeowners.
“[W]ouldn’t it be worth it, given the gravity of the situation, to sit down with the agencies involved and have a cram session, like you did this weekend to bail out Bear Stearns?” Rodriguez asked. “Isn’t it just as important to bail out homeowners in trouble as it is to bail out an investment giant in trouble?”