Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
As the story unfolds of the Federal Reserve’s action in what appears to be a $30 billion insurance policy written in favor of JP Morgan (with no premium payment but with a $1 billion deductible), more pressure mounts on Congress and the Bush Administration to provide direct relief for the diffused but nonetheless “systemic” risk in the US-based (but globally impactful) mortgage market.
Indeed, there was no “bailout’ of Bear Stearns; rather, a burial, with a $10 eulogy. And there was no bailout of JP Morgan or Wall Street, either. But there was Federal aid, and plenty of it, because the financial hazard to the system was worse than the “moral” hazard of providing relief
The same treacherous conditions remain in the mortgage market. Not moving to aid distressed mortgagors with incentives for financial institutions to write down their mortgages to below the relevant homes values (no worse a travesty on the free market than, say, re-valuing stock options grants for executives that went under water with stock price declines) only defers further the needed restart of the securitization market for mortgage debt generally. The revival of the securitized secondary market, in turn, is a prerequisite to return the US housing market back to a growth path.
So enough of the purist posturing about not rewarding speculators with government financial props — we do that in the oil drilling market every day of the week and twice on Sundays!
