ReformerRay

Explaining the Bear Stearns Rescue

Ok - In an emergency, you patch things together.

However, after the emergency, you look back and make things more fair.

For example, all the money the Federal Reserve Board is making available to depository institutions comes with no haircut for the securities accepted by FRB. Why is that?

FRB should adopt a new rule, as soon as the emergency is over, to provide funds at a discount relative to the face value of the securities. In fact, this rule should be applied retroactively.

The Fed is pumping too much liquidity too fast into a system that is not working because of uncertainity. This uncertainity will not be relieved until the extent of non-payment of mortgages becomes clear. That will take years.

Allow asset values to contract. Look to the future rather than to the next week.