Magnus Itland (itlandm) wrote,
Magnus Itland

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Bear market

Furry jokes will abound among economists, after the investment bank Bear Stearns was sold to competitor J.P. Morgan for a measly $2 per share this weekend. To put this in perspective, it started last week close to $70, and by all accounts (literally) is worth more than that. But this is not about accounting, but solvency. Investment banks are by their nature dependent on short-term capital, and investors rushed to get their money bank after rumors of losses. Bear in mind that the losses were not on such a scale that they would wipe out the capital. Rather it was the run on the bank that caused it to collapse. If J.P. Morgan avoids a similar fate, they should be able to gain a tremendous fortune when the market turns. Which it will do sooner or later. However, if it is later, Morgan may not be around (in its present form) to enjoy it.

One possible outcome is what happened here in Norway during the previous recession: The state bought the largest business bank for a few cent. Not per share - for all the shares. A few years later it is still the biggest business bank and the state can enjoy a steady dividend for free. It is highly unlikely that the current US government would allow such a nationalization of banks, but things could change when America gets its first Social Democrat president.

The injection of liquidity in the market by the Federal Reserve should in theory be enough to avoid such episodes as the collapse of Bear Stearns. However, it did not qualify for the measures that could have saved it. In light of this, I am not impressed by the Fed's choice to lower interest rates in an "emergency room" operation on a Sunday. It gives off a vibe of panic, very nearly the worst thing a central bank can do. Many economists already regard Ben Bernanke as a "chicken": He is a brilliant academician but lacks credentials from the business world, and he took over the Fed so recently that he has had no time to prove himself. And now that the time has come, he has failed to impress thus far. Though it is hard to say for sure who could have done it better.
Tags: economy
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