David,

I sympathize with anybody who wants to maintain the freedom of markets, but it’s not much of a bail-out for the owners of Bear. Even assuming the deal eventually closes at $10 per share, this is about the value of Bear’s office building. It’s also not much of a bail-out for Bear’s employees, a majority of whom will probably lose their jobs and large chunks of their retirement assets which tend to be tied up disproportionately in now almost-worthless Bear stock. The New York papers are already projecting a larger hit to the residential real estate purchase market than rental market in Manhattan as Bear employees sell their condos for needed cash and become renters – which is an ironic version of the bankers rather than mortgage-holders losing their homes.

It is a bail-out for Bear’s counter-parties, their counter-parties and so on, otherwise collectively known as the American financial system. These kinds of interventions are never a great idea, but can be the lesser of two evils. Would it have been preferable to let the bank run on Bear proceed, and taken the serious (though difficult to quantify) risk of contagion? A cascading series of bank runs would be very, very ugly. In effect, the Fed is running the risk of returning to the 1970s in order to reduce the risk of a return to the 1930s.

Of course, this only refers to the specific action of the Bear purchase, rather than the numerous methods the Fed is now using to flood the banking system with liquidity. I don’t think anybody, the Fed included, is doing anything more than trying to feel their way through the crisis.