The phrase "through a mirror darkly" keeps popping to mind as I think about where the housing/credit crisis and the government's response to it are taking us. We are entering uncharted territory. What seemed unthinkable a few months ago is not only possible today but maybe even probable.
The Fed's brokering and backing of the JPMorgan-Bear Stearns deal may be just the start. Think about it: Uncle Sam might well be on the verge of doing one or more of the following: 1) refinancing a couple million mortgages and requiring lenders to write down the value of loans; 2) buying—via the Fed—billions in mortgage-backed securities; 3) creating a new government entity to nationalize troubled institutions.
Big Government seems to be definitely back in the building. And if it isn't, I think it at least just pulled into the parking lot. I mean, just look the new regulatory scheme from Treasury Secretary Henry "Cut Your Dividends" Paulson, a plan that banking analyst Richard Bove says:
...is no less than a new SEC to regulate and enforce a series of costly new rules imposed on the financial industry and mortgage holders. This work is a bureaucrat's dream. It demonstrates little faith that the markets can police themselves (with some justification). In addition, the Treasury Secretary has suggested that banks review their dividend policies. Once again he is exhibiting his view that the government interfere in private sector practices. (The fact that a guy from Goldman Sachs can be so anti capitalist never stops amazing me.)
Intervention. Regulation. Nationalization. No such thing as a free lunch, folks. These are prices the private sector will pay for government help. History will judge whether the price was too high. Nicole Gelinas, from the Manhattan Institute website, is certainly on to something when she writes the following:
In our service-based economy, one of the biggest wealth generators is supposed to be a highly sophisticated, innovative elite of bankers, traders and investors. The Fed's sudden determination that these folks need the same kind of protection from their own behavior as Grandma does is a watershed. No doubt these newly protected traders and other creditors are happy, at least for now. But they should realize that, along with government protection, could come all kinds of unwelcome new regulations so that the Fed can protect itself.
Indeed, columnist Harold Meyerson at the Washington Post thinks the federal government, in exchange for all the Fed's liquidation moves in recent days and weeks, should have a seat on the board of directors at major financial institutions. "Bring on the new New Deal," he writes.
Now, maybe the Fed's interest rate cuts and creation of an alphabet soup of credit facilities and, finally, the ritual sacrifice of Bear will be successful in easing the strains in the economy. And maybe these further steps won't be taken. But I think we have already passed that exit.