Overclass Blues

Daniel Gross brings some quality snark:

Conservative critics constantly carp that the culture of poverty has encouraged a sense of dependency on Washington. Of course, in recent months, the bureaucracy—the Federal Reserve, the Federal Housing Authority, Fannie Mae, and Freddie Mac—has generally ignored the struggles of poor homeowners. Yet it vaulted into action to save the bankers from their own disastrous bets. When Bear Stearns, the nation's fifth-largest investment bank, approached insolvency, the Feds orchestrated JPMorgan's acquisition of it.

Now of course there's a reason for that; the poor and the middle class aren't "too big to fail." Still, this is where basic issues of justice come in -- the Bush/McCain policy in this regard is simply outrageous. People in need deserve some help, too.

Photo by Flickr user Toni V used under a Creative Commons license

Comments

Why aren't the poor and middle class too big to fail? Wouldn't the failure of the middle and lower classes have more of a destructive effect on our country than the failure an investment house?

Posted by Dolly Dagger | March 31, 2008 9:54 AM

I love how "conservatives" are all about individual accountability, and how large corporations are legally classified as "individuals" yet have very little accountability, and it's all dandy.

Posted by Bill | March 31, 2008 9:55 AM

Bear Sterns did fail. Its employees are losing their jobs, and its shareholders are screaming that the Fed gave them a bad deal.

What Bernanke did was protect Stern's creditors from the fallout. This creates a moral hazard problem all its own, but it is not, in any way, a favor to Bear Sterns.

They are going out of business.

Posted by heedless | March 31, 2008 10:10 AM

Bear Stearns shareholders got $10 for stock that was previously worth >$100. Do you think if the federal government bought all US mortgages for less than 10 cents on the dollar we would call it "saving the homeowners from their own disastrous bets"?

Posted by right | March 31, 2008 10:12 AM

right,

That is a false analogy. If Bear Strearns collapsed, their stock would be worth $0. So the Fed's bailout caused stock worth 0 to be worth $10.

Even in the worst of the foreclosures, no home is going to suddenly be worth zero dollars.

Posted by freddiemac | March 31, 2008 10:30 AM

a) help will be coming for homeowners, which will b) likely be more costly for the gov't than the Bear creditor bailout.

But this is an indication about the ways investment and capital are socialized in America. That a collapse of the banking/financial system is more frightening to the powers-that-be than massive foreclosures or unemployment indicates a dire lack of pitchforks and guillotines.

Posted by bob mcmanus | March 31, 2008 10:35 AM

That a collapse of the banking/financial system is more frightening to the powers-that-be than massive foreclosures or unemployment indicates a dire lack of pitchforks and guillotines.

A note from the underground, no?

Courage.

Posted by JA | March 31, 2008 10:52 AM

I still don't get the argument that Bear Stearns was "too big to fail." Has anyone explained why this is so?

The major function of an investment firm like Bear Stearns is to help companies issue securities. If I'm a firm wanting to issue bonds, and Bear Stearns goes out of business, then I can just go to any number of other investment banks who will be more than happy to have my business.

What am I missing?

Posted by Nordy | March 31, 2008 11:27 AM

If Bear Stearns collapsed, their stock would be worth $0. So the Fed's bailout caused stock worth 0 to be worth $10. Even in the worst of the foreclosures, no home is going to suddenly be worth zero dollars.

First of all, you make my point quite nicely. It's silly for people like Matt to compare the two.

Second, the Fed intervention did not save Bear Stearns, it saved Goldman Sachs, Citigroup, Lehman Brothers, Morgan Stanley, Bank of America, and every other financial institution in the country. While it might be viscerally satisfying to see some of these places collapse along with their fatcats, the truth is every American has a huge stake in their continued survival, as the entire economy depends on it. The same is not true for home equity.

Posted by right | March 31, 2008 11:31 AM

Why aren't the poor and middle class too big to fail?

This is going to sound cruel, but by definition haven't the poor already failed?

Posted by matt foley | March 31, 2008 11:35 AM

This is going to sound cruel, but by definition haven't the poor already failed?

This is gonna sound cruel, but by definition haven't we already failed the poor?

Posted by bob mcmanus | March 31, 2008 11:42 AM

right,

I you argue that "the truth is every American has a huge stake in their continued survival, as the entire economy depends on it. The same is not true for home equity".

I disagree. Our economy depends on consumer spending, which was fueled over the last 6 years by the housing boom. Home building provided jobs to construction, realtors, and mortgage bankers. Consumers fueled their consumption by leveraging against rising equity. With equity dropping, we will see a drop in consumer spending. I see no reason why this would be less potent to the economy than a banking collapse.

Posted by freddiemac | March 31, 2008 11:49 AM

The Irvine Housing Blog put things in a way that really brought all this home to me. Over the past five years, in that part of the world, owning a home has been like having an additional median wage-earner in terms of increased valuation --that is, if you cash out the equity through the refinance/equity line ATM.

The boom has shielded people from stagnating wages and higher costs in areas like healthcare. The bust lays all that bare.

As for the economic bureaucrats, they don't want to upset the corporate executives they meet on a regular basis. The little people don't really figure.

Posted by pseudonymous in nc | March 31, 2008 12:02 PM

The ;'too big to fail' thing only works out when you don't have to save their asses every decade. The way things have worked out, these businesses are clearly so poorly run as to be little more than economic dead-weight.

business have to be allowed to fail, otherwise you develop a profound amount of institutional decay. That's what we're seeing now, a bunch of businesses run more on nepotism and classism than on past success. It's rotting this country from the inside.

Posted by Soullite | March 31, 2008 12:23 PM

This is going to sound cruel, but by definition haven't the poor already failed?

"He went away sad, because he had great wealth."

Posted by Jeffrey Davis | March 31, 2008 1:15 PM

Our economy depends on consumer spending, which was fueled over the last 6 years by the housing boom.

This is true, but that level of consumer spending was not sustainable, just like financial profits over the same period. Neither is coming back.

With equity dropping, we will see a drop in consumer spending. I see no reason why this would be less potent to the economy than a banking collapse.

Because you're making the same fallacious comparison you critiqued earlier. The banking collapse sends everything to zero. The home equity drop takes out 20-30% of home values. There's an enormous difference.

Posted by right | March 31, 2008 1:33 PM

"People in need deserve some help, too."

Does that include people of modest means who are looking to buy their first homes at reasonable prices? People who were prudent enough not to buy at the top of the bubble? How will they be helped if the government artificially props up unreasonably high home prices, by helping those who bought more house than they could afford stay in those houses with new mortgages with artificially low rates?

More damaging for the economy, most economists agree that for us to get past this crisis, home prices need to bottom out to reasonable levels. Election-year handouts that delay this process will hurt the overall economy.

Posted by Fred | March 31, 2008 2:05 PM

"Our economy depends on consumer spending, which was fueled over the last 6 years by the housing boom."

The current account deficit in general has been supported by the housing boom and the profusion of household debt (home equity, credit cards, margin loans, etc.) over the last 10 years. It was always considered unsustainable, and if something can't continue indefinitely, it won't. Going forward, Americans will be saving more, borrowing less, consuming less, and, in particular, consuming fewer imports, as the current account deficit narrows and the de-leveraging continues.

Posted by Fred | March 31, 2008 2:11 PM

"The banking collapse sends everything to zero"

You're assuming that every bank collapses. Shouldn't the banks decline as much as housing? Bear Stearns is one of many.

Posted by freddiemac | March 31, 2008 3:12 PM

You're assuming that every bank collapses.

If Bear Stearns had declared bankruptcy, there is a very high chance that every other US financial institution would have quickly followed. Certainly every investment bank.

Posted by right | March 31, 2008 5:11 PM

The deeper question is, who allowed these corporations to BECOME too big to fail?

An emasculated FTC and Justice Department that approves all mergers, and a Congress that repealed Glass Steagall to allow the recombination of banking and investing functions in financial institutions.

Posted by nogoatee | April 2, 2008 1:29 AM