This weekend, the Federal Reserve helped to finance a deal to sell the troubled investment bank Bear Stearns to JPMorganChase. As widely repored, Bear was selling for $60 a share last week — and was near $160 last spring — but on Sunday was sold for only $2 a share, which is less than its building on Madison Avenue in NYC is worth.
What does this mean for Joe Blow consumer? While the Fed is willing to bail out large Wall Street firms who make bad decisions — egregiously bad decisions, in fact — it hasn’t done much for regular homeowners, especially for those who now owe more than their homes are worth. While their move to rescue Bear Stearns is certainly warranted to restore confidence to financial markets, you’d think they’d make similar moves to rescue our country’s middle-income Americans.
The federal government ought to do more to help homeowners who made bad decisions, not just Wall Street investors who made bad decisions. Who else does the Fed’s bailout doctrine apply to — any Wall Street firm that fails? Many Washington groups have kicked around the idea of the federal government buying up pools of bad mortgages at a discount and re-finance the borrower into a loan at the present value of the house. While the lender “takes a haircut” under this scenario, everyone has to lose before the situation gets better.
Former Fed Vice Chair Alan Blinder, now a professor at Princeton, wrote this in today’s Washington Post:
First, everyone should take a deep breath. To those living far from the canyons of Manhattan, the sky is not falling. If you don’t want to sell your home, forget about falling house prices. Even on paper, it’s unlikely that you’ve “lost” anything near what you “gained” in the run-up. Yes, the economy is limping, but it’s not collapsing. And the effects of the Fed’s interest rate cuts and the stimulus package that Congress enacted last month are still to come.
Mass.) and Sen. Chris Dodd (D-Conn.) are working on a fine bill that, by easing some of the stresses in the mortgage market, could do some real good. I urge Frank, Dodd and the Democratic leadership to expedite the process, and congressional Republicans should stop standing in the way.
In 1933, Franklin Roosevelt famously told Americans that “the only thing we have to fear is fear itself.” Unbridled fear is gripping today’s financial markets. We need some soothing words right now — followed by actions, as FDR’s words were. Who will step forward?
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