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The Capitalist Consensus

John Tamny writes:

To a high degree the capitalist consensus held until last spring. It
was then that Bear Stearns, a fairly minor bulge bracket investment
bank, ran into trouble. With its share price in freefall heading into
the weekend, officials at Treasury and the Federal Reserve effectively
blinked, and a forced marriage ensued in which J.P. Morgan purchased
Bear for next to nothing in return for the Fed taking on the fallen
investment bank’s “toxic assets.”

Even though Bear Stearns wasn’t a bank in the traditional sense,
government involvement was defended by some as necessary to avert a
collapse of the financial system. Myriad other financial institutions
had exposure (“counterparty risk”) to trades entered into by Bear, and
absent the infusion of government capital, our system of credit would
supposedly have cascaded downward, Depression the certain result.

In a November 21 speech for the Cato Institute, Harvard professor
Jeffrey Miron eagerly stated that the idea of counterparty risk is
overdone. Miron noted that the only scholarly work on the subject was
written by none other than our present Fed Chairman, Ben Bernanke, back
in the early ’80s. Bernanke’s fears of a domino effect with regard to
banks were then, and remain pure conjecture. And assuming the domino
effect is real, when we consider how whole countries have bounced back
from total economic and human destruction as a result of war, it seems
a reach to assume that ours would fail to bounce back from the demise
of one or many banks.