A Bearless Market

First, I promise to spell, in this post, and every subsequent post in which he is mentioned, David Paterson’s name correctly, with one ‘t” and not two. In his excellent “swearing –in” speech today, Paterson made reference to the remarkable collapse of Bear, Stearns, which was acquired by J.P. Morgan of a mere $2 a share, a tenth of what it was trading for on Friday. J.P. Morgan, reprising its role as a white knight, a role on Broadway it has played since the 1890s, has once again come to the rescue of a foundering investment firm. There are many aspects of the deal that remain uncertain, and I do not claim to fully understand the complex and intricate financial arrangements that have gone on the past week. What happens to the Fed’s guarantee to vouch for up to $30 billion of Bear Stearns troubled securities? What happens if more dominoes start to fall? One reason the price for Bear Stearns was so low was that no one knows what sort of dangers lurk for the acquirer of its debt; J.P Morgan has reportedly put aside $6 billion to cover law suits and losses from its new acquisition.

The role of the Fed in all of this remains somewhat mysterious to me; whatever Bear Stearns is in the hermaphrodite financial culture that has existed since the end of Glass-Steagal, it is not a commercial bank, the supervision of which was the primary and original responsibility of the Fed, but since large investment firms have taken over the former role played by commercial banks—the very name J.P. MorganChase is an indication of the change in corporate culture, who else is the Fed supposed to rescue if the economy starts to falter?

I would second the comment of a commentator who pointed out that one of the chief abilities of a government is to declare a crisis, and then argue that the exigencies of the crisis require that normal legal protections be relaxed or entirely obviated, in the interest of addressing the matter at hand. We have seen the Bush administration do this, in spades, after 9/11/ and in the run up and subsequent to the invasion of Iraq, where anyone who questioned the legality of various acts, from warrantless wiretaps to torture to the legal rationale of the invasion itself were derided as triflers, speaking of legal piffle when Rome burned. In a modern state, the bureaucracy almost always trumps the legal system, which at best is reduced to the role of playing perpetual catch-up. In recent months, the Fed has been declaring a crisis, and then trying to figure out how to assume the powers appropriate to crisis management.

Now, I am not saying there is not a crisis in the financial markets, but the very act of declaring a crisis has loosened an already gossamer-like regulatory apparatus, giving the Fed the right, so it seems, to intervene in financiakl markets in almost any way of its choosing. The Fed’s actions in recent weeks have had an improvisatory character, trying one thing after another, to apparently little avail. I am ever more convinced that there will be no calming of the financial markets until there is a comprehensive rethinking of their regulatory framework, and this will not happen until Democrats place the question of financial regulation front and center in their platform.