Fed Helps Rescue Beleaguered Securities Firm, Raising Fears of “Moral Hazard”
Mar 17th, 2008 • Posted in: NewsIn related news, proposed rules call for more transparency in mortgage terms; also, as economy sours, bill collectors try to clean up their image
NEW YORK
The U.S. Federal Reserve last week decided to use government funding to back a bailout of the securities firm Bear Stearns Cos. in a move that drew criticism from those who say the government has no business rescuing a firm foundering because of miscalculation.
As this issue of Newsline went to press, JPMorgan Chase had agreed to purchase Bear Stearns at fire-sale prices, with the backing of the Federal Reserve, according to a report from MarketWatch.
Vincent Reinhart, a former Reserve official, said the move amounts to “a re-drawing of the relationship of the Federal Reserve with the rest of the financial system,” Bloomberg reports. Reinhart said the risks of so-called moral hazard — where firms are encouraged to be reckless because they count on a government bailout — “are considerable.”
The same moral-hazard argument was invoked over the summer by former Labor Department secretary Robert Reich, when the Federal Reserve lowered the discount rate after the failure of two Bear Stearns hedge funds, according to Investor’s Business Daily. Last week, Reich reiterated his warning, comparing the current bailout with “someone with a helium tank blowing more air into a leaky balloon.”
The collapse of the subprime mortgage industry is blamed for much of the shakiness in financial markets.
Under new rules proposed last week by President Bush and the Department of Housing and Urban Development, mortgage lenders would be required to give more accurate estimates of closing costs and provide more thorough explanations of payments, reports USA Today.
In related news, the debt collection industry, stung by criticism painting practitioners as remorseless predators, is trying to polish its image, according to New York Times reporter David Streitfeld. “They have started calling the indebted ‘our customers,’” Streitfeld writes. “They are pushing consumer tips on the ideal way to respond when a collector comes calling (basically: pay up). They note that debt collecting is an old American tradition. (Abraham Lincoln was a debt collector, some histories say.) They point out how, in a time of rising unemployment, they are hiring.”
While some say the kinder, gentler approach is a reflection of the attracting-more-flies-with-honey-than-with-vinegar approach, there is another reason for the public relations push, reports the Times: tough economic times could bring more scrutiny of collectors and regulators.
“Collectors are in a jam,” Robert Hunt, a senior economist at the Federal Reserve Bank of Philadelphia, told the Times. “The business is so big and the anecdotes so nasty, they can’t hide.”
Sources: MarketWatch, Mar. 17 — Bloomberg, Mar. 14 — Investor’s Business Daily, Mar. 14 — USA Today, Mar. 13 — New York Times, Mar, 13.
For more information, see: Related Newsline story, Mar. 10 — Related Newsline story, Feb. 25 — Related Newsline Commentary, Feb. 18 — Related Newsline story, Feb. 18 — Related Newsline story, Feb. 4 — JPMorgan Chase press release, Mar. 16.
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