The burden of housing costs in nearly every part of the country grew sharply from 2000 to 2005, according to new Census Bureau data being made public today. The numbers vividly illustrate the impact, often distributed unevenly, of the crushing combination of escalating real estate prices and largely stagnant incomes.The response of the Fed and the Administration to the looming mortgage crisis? Nada - except to raise interest rates which exacerbated the problem. Which brings us to the current "swift" action in the form of the "bailout" of Bear Sterns. Bear Sterns is an eighty-five year old firm and the fifth largest U.S. bank. Actually, Bear Sterns is not a "bank" per se. It is an "investment bank', which means that it deals in equities and securities to provide monies for governments and companies. So, the Federal Reserve makes $30 billion (with a B) available to back the investments of Bear Stearns. They make that money available through JP Morgan Chase (and Bank One), which is a competitor of Bear Stearns. Just on the face of it, such a move raises a ton of questions. Why is the Fed assuring the funds of the private investment industry? Why do it through JP Morgan rather than Bear Stearns directly? Whose money is the Fed lending, and exactly what happens if the backing of those investments fail? Some of these issues are answered in a March 17, 2008 Business Week article "article. In trying to address why the Federal Reserve would back JP Morgan in acquiring Bear Sterns, the authors state:
To protect JPMorgan from the greatest risks on Bear Stearns' books, the Federal Reserve agreed to guarantee up to $30 billion of Bear's most troubled assets -- primarily mortgage securities that have plummeted in value and have become tough to sell.They go on to note that tax payers could be on the hook for the money, but that the Fed also has its own reserves from the sale of Treasury Bills and securities. The Fed has indicated it would back up to $200 billion to avert the mortgage meltdown. As to why JP Morgan rather than someone else. I think we need look no further than the lobbying money that has been spent. See Bear Stearns and JP Morgan lobbying tallies below (courtesy of OpenSecrets.org).