Socialism bailing out capitalism? (The Federal Reserve and the Banking problems)

Hi,In the case of Bear Sterns, we will have to wait and see.As with Enron, it is possible that the management was disclosing false information in their proxy and in the media. The week prior to the collapse, rumors were circulating that the problem with mortgage-backed securities and the credit crunch would soon cause Stearns to become insolvent. Stearns management issued a statement denying this.Stock holders didn't buy it and Bear Sterns stock collapsed because there was a run on funds by the consumer. As investors dumped the stock, the price started to fall dramatically. Bear Sterns was not a retail bank but a capital management and investment firm. Anyone with eyes and ears could see the mortgage and credit crisis was going to be a major problem for the company. Investors are jittery right now and the slightest rumor will cause stocks to fall. Panic and fear caused the Stearns stock collapse. Outside of shutting down the market, you cannot stop investors from selling their shares.Now, if it can be shown that Bear Sterns put out false financial information to the investors, they would certainly be guilty of securities fraud; however, before we label this as an example of excess and abuse, let's wait and see. Most financial's are all over the board. National City Corp has lost nearly 80% of its market value due to the mortgage and credit crisis. Washington Mutual is also tanking. Things like this are going to happen in this environment.Stocks tank and corporations become insolvent for all sorts of reason. Stearns is a large corporation, so it's getting the headlines. Until we have all the facts, it's premature to start calling for a lynching. They only had two options--file for bankruptcy or sell at a fire-sale price.The Feds jumped in because they had to--their job is not just to regulate but also to keep the economy healthy. There are lots of ways they can do this -- adjusting the interest rate that banks use to lend to each other is just one way. In this case, the Bear Stearns news was obviously going to cause massive panic and a run on funds at other institutions if they did not do something quickly. NCC stock went from $13.87 to $6.56 in 15 minutes after opening just because of the panic caused by the news. The rationale was, if this can happen to a securities firm as large as Stearns, it can happen to anyone. Everyone wanted their money out of struggling financial's.This is an example of the Feds doing what they are supposed to. They HAD to do something to stop the panic sell-off in the financial's or you would have seen about 5 other corporations eating it. The only way to counter panic selling is by instilling confidence -- in this situation, letting the investors know the Feds would step in during the mortgage crisis was the only way. It worked - there was a large rally on financial's the next day and the sell-off stopped.Regarding abuses, do they happen? Of course. Is the system perfect? No system is. As long as there are human beings, there will be greed and corruption somewhere. There will always be people who seek to take advantage of a system and there will always be those who turn a blind eye to corruption. If someone thinks these things happen only in a free-market economy, they are naive.BTW, if you want to make some cash, nows a good time to buy BSC. If you purchased shares at $2.47 on Wednesday, your'e now sitting at $5.96.

It is really disconcerting to see intelligent people lose their objectivity and make blanket statements. The market is currently undergoing a very serious financial crisis that started in the housing sector and now is touching virtually every other industry. If you think the deal with Bear Stearns was meant to only benefit the 'high and mighty', you might want to reconsider this position. If the erosion in consumer confidence continued, there would have been a further run on funds that would have brought down not only a handful of other financials, but would have leaked over into other sectors very rapidly. It just takes one large domino to fall to take the whole market down with it.When this happens, a lot of consumers would be waiting months for their FDIC insured deposit checks to be processed. In the meantime, the consumer's bills would go unpaid, causing further defaults in the housing market and credit environment. In addition, the companies that went insolvent could not meet the payroll and would be forced to employ massive layoffs, just as with Bear Stearns. This makes the problem even worse, further eroding consumer confidence and spending. I guess the Feds should have done nothing because someone rich might benefit.To state any intervention is simply meant to benefit the high and mighty is a grossly oversimplified generalization. It really is not that simplistic, although it is quite easy to paint it that way if one wants to read into the situation whatever is expedient. There will always be those who frame corporations and a free market in a negative light, decrying them as evil empires who's goal is nothing but holding down the poor while propping up the rich. Likewise, there are those who will state the system cannot be made any better and is always just and fair. Like most extremes positions, the Truth is usually never so black and white and lies somewhere in between.

Without a dobut, the current crisis was definitely brought on in part by predatory lending practices in the housing sector. These practices are not only unethical but also unwise -- lenders like Countrywide knew ahead of time that the market was over-valued, so did everyone else. Nobody cared -- lenders continued to hand out variable rate mortgages like candy to anyone who could sign their name. When the rates changed, people could no longer pay the premiums. Nobody was planning ahead and the classical risk models failed badly. It was blatantly obvious that the housing bubble would eventually burst at the seems(as it has now).If anything, this is a case of the chickens coming home to roost. The fact is, the high and mighty who started it all are falling like dominos and going into the poor house - their greed and lack of foresight has caused these lenders to go insolvent. Amidst their frenzy for a quick buck, they failed to ask one thing - what happens if the market value falls and they cannot recoup the cost of the mortgage in foreclosure since the property was initially over-valued? Well, it happened, and they are now left holding securities worth 70% of their book value and many lenders have become insolvent and nobody will invest a dime in these securities.It is definitely time for change. Congress must pass strict regulations to eliminate this type of lending practice to insure this scenario never happens again; for ethical reasons, but also practical reasons as well - without intervention, this type of scenario could easily bring down the entire economy. Yes, the current crisis was precipitated in a large part by greed. This doesn't make the system broke, it makes the system in dire need of change. EVERYONE stands to lose in this scenario and it is good for nobody.If it's any consolation, the lenders that started it all are going broke as everyone cuts and runs. Also, the financials like Bear Stearns that used mortgage backed securities to invest can't by a pot to pee in. When your stock goes from $190 to $2.10 in under a year, you are not getting rich, you are getting busted. Trust me, they are not making out on this. Nobody saw this coming -- if they did, the greedy would have covertly bailed and taken their money out and kept silent(ala Enron).One more note -- If this was an Enron-style affair, you would have seen the Execs selling their stocks well ahead of the collapse. This did not happen. Obviously, they did not this coming as the stock slowly dipped, remained stagnnant, then fell suddenly to $20. Edited by Grizz, : No reason given.

I guess it depends on the goal of the intervention. The way out of a recession is to get the consumer spending again. Capitalism requires growth. Intervention should be focused on quelling fear and instilling confidence. It doesn't always happen that way, and yes there is often favoritism and catering to the high and mighty. The Stearns bail-out was a case of the former. The Feds clearly had to stop the sell-off and let the consumer know they will jump in if needed.Ultimately, the question that hounds us is how do you stop corruption and greed? There is noting wrong with wanting to make a profit. How do you fulfill that goal while keeping things honest. How do you temper man's desire to sometimes choose the wrong avenue or abuse others? Man has been asking these questions for eons and it goes beyond any economic system. One could argue that in a capitalist system, it is easier for people to manipulate the system.Does this mean the system is bad and should be tanked or does it mean we need to address problems as they arise, learn from our mistakes, and strive for ethics and integrity? Easier said than done, yes, but what else can we ask for, while at the same time being realistic about prospects for change? These are complex issues that are not easily solved.

I am not sure what cycle you are referring to. Stocks crash because investors lose confidence and take their funds out. In a free market system you cannot stop investors from selling off their shares if they get jitters.In a nutshell, here's how it works:It doesn't matter if you're McDonalds or a Chase Manhattan, for a publicly traded company, initial Capital comes from investors. The upstart company will get SEC approval and a license for incorporation and will then announce an IPO(initial public offering.) The controlling party will use the investment funds brought about by sales of stock to build capital that is used to run the business. Once profit is realized, the controlling party will usually supply a dividend to shareholders - so much per share. The holders of the stock are always free to sell their shares or buy new shares at their discretion. The company does not control this.Anyone can by or sell stock in any corporation. It is not limited to the rich or high and mighty.The price of a stock is not determined by the feds or the controlling parties -- the price is simply what investors are willing to pay at any given time. It is nothing but an auction. When stocks are auctioned on the trading floors, the price you see on the tickers represent the current bid for a share of common stock --it's what people are willing to pay. If nobody bites, the corporate traders on the floor lower the bid until buyers start emerging. If there is a large volume of 'sells', the value of the stock bid also goes down due to low demand. If the sales volume goes up, the price bid goes up as the demand is high. It's supply and demand and nothing more.How investors manage their shares is influenced by a lot of things - news, company reports, financials, lawsuits. Just about anything negative can cause shareholders to dump the stock in a heartbeat. With Bear Stearns, bad news kept coming in and coming in. One year ago, the taking bid for Stearns was $190 a share ! That's what people were willing to pay. Last Tuesday, a rumor circulated that they were going insolvent and that was the end of BSC. The bids kept dropping and nobody was buying --$50, $20, $15, $10..still nobody buying. The closing bid was $2.57 and still, nobody was buying. The stock crashed. The company lost it's capital position and could no longer continue as investors pulled all their funds. Kaboom.How do you prevent this? What do you fix? You can fix issues that cause the bad news but you cannot change the dynamics. It's all fear and panic that causes selling. That's the nature of the beast.If the Fed's had not stepped in, about 5 other financials would have tanked along with BSC. NCC and WAMU dropped 62% in 5 minutes on the BSC news as investors frantically sold their shares thinking the same would happen to them. Basically, the BSC scenario scared the living daylights out of investors. Stocks are always a gamble --you are basically betting that the company will come out ahead. If it doesn't, you stand to lose.Regarding whole market crashes -- after the 80's crash, the FEDS put in place a safety measure to stop trading if investor sell-off reached a certain mark.Other than that, what can you do?

It depends on how diverse their investments were. If 90% of your funds were invested in Bear Stearns, you are acrewed. We know for sure they lost a lot, regardless of what the percentage was. Nobody gained from this. Anyone who owned controlling shares lost a lot. The price went from $190 to $2.57.

The government does have a lot of regulatory powers already. I am not sure what else can be added as there are so many unknowns. We learn from our mistakes and go from there. If I could answer that question, I wouldn't be here -- I would be accepting the Nobel prize in Economics.It would take an expert on international trade to really offer up any serious opinions on that. I wouldn't know where to start to be honest. The only thing that comes to mind is what everyone else is thinking --to keep corporations from going overseas, offer tax breaks.

For those wanting change, here is a thought on the most expedient way to bring it about:We, the consumer, are the economy. We are all consumers -- some consume more than others, but we all consume. As consumers, we have the last say. Corporations are only giving us what we want. For good or bad, we built this structure, all of us. We continue to feed it. The system is neither good or bad, the system is fullfiling on our wants, not our needs.We do in fact consume more than any other nation on the planet. We sit and act helpless, complaining about the powers-that-be controlling us when it is we, the consumer, that controls production.Here in the US, we are not concerned with what we need but what we want. There is nothing wrong with fulfilling wants, but it is irrational to complain about the system when the system is simply giving us what we ask for.-- We need food to survive. We do not need Ho Ho's, Big Macs, Beer, and Chips. We want them.-- We need clothes for survival. We do not need designer jeans, fashion accessories, makeup and Macy's. We want them.-- We need shelter for survivial. We do not need 5,000 square foot homes. We want them.-- We want an SUV when we can drive a car. We then complan about gas prices and Big Oil.We want IPOD's, computers, technology, and research. We want the Internet, ISP's, and Google. We want Plasma screen TV's when our old 30 inch Diodes will do just fine. We don't need these things, we want them. The free market systems in the US, Japan, Canada, and the UK has supplied these to the world. It is our economic system that makes these things possible. Without investors, capital, and corporations, these things would not exist as they do now.Are we really willing to forego these things to 'make things right'? The only way to change the system is by changing consumption patterns. If you really want to affect the environment, stop buying SUV's when you can get buy with the 2 door sedan -- or just take the bus. If you want to affect food consumption and availability, stop buying the Big Macs, twinkies, and chips.Without the demand, these things would not exist. We drive the economy. You, the consumer, have more power to bring about change than the government ever will.

Everyone should also keep in mind that Socialist policies and a Free-Market are not mutually exclusive. Also, there never have been pure socialist or pure capitalist economic systems. The idea of equal distribution of wealth is as much a pipe dream as is the idea of a capitalist market free of restraints. Neither system would last long.We tend to view things in black and white, but the reality is actually a canvas of color that spans the spectrum.

Where can I go to get this free money that materializes out of thin air?I was reading a story on CNN about a guy who allegedly auctioned off a Corn Flake for $500. He says when he went to pour milk on his cereal, he saw the face of Mary staring up at him from one of the flakes. According to the story, he sold it for $500 to a Nun in Sweden. I don't know if the story is true, but let's assume it is and lets assume the guy was being honest when he thought he actually saw an image of Mary on a Corn Flake.Our first response is to laugh and try to figure out what kind of sucker would purchase something the average Joe wouldn't fork over a penny for. It doesn't matter if you think it was worth $500, however -- someone obviously thought it was. Did the guy deserve the $500? Someone out there said yes. Also, the money didn't materialize out of nowhere, it already existed. He didn't get money for free -- he exchanged it for goods that were in demand by a buyer.We say the same about Executive salaries and to us they seem ridiculously excessive, and to me they are. The fact is, however, that is what the corporations are willing to pay the executives to run the company. Again, it is supply and demand. That's the current asking price for a CEO. Without the salary, no CEO. The money to pay the salary does not materialize out of nowhere and they are not getting it for free. Overpriced bell hops? Perhaps. But just like the $500 Corn Flake, a commodity was exchanged in trade.I am not defending excess and I am far from wealthy -- I am making ends meet as I finish up Grad School. I don't think either scenario above is a fair exchange but again it's now what you or I think -- it's what the buyer and seller think. I just realize there is nothing we can really do about these things. That's the market value of a CEO or a corporate executive -- or a Corn Flake inscribed with an image of Mary. Edited by Adminnemooseus, : Topic derailment alert.

Sorry. I rarely get to discuss this topic with anyone so I was all fired up.In response to the initital question - I do not see the BSC bailout as Socialism bailing out Capitalism. I see such things as prudent amd neccessary measures in a free-market economy. One could certainly call it a Socialist intervention, but this is simply semantics. As I stated in an earlier post, Socialism and Capitalism are not mututally exclusive. They can actually complement each other quite nicely.The US economy actually has elements of both - not with the same mix as Europe or Canada, but the US is far from being a pure Capitalist enterprise. My opinion is the Government should intervene if it will benefit the overall economic stability of the nation. Edited by Adminnemooseus, : See "Added by edit" above.