Fed's New Approach - Shades of FSLIC in the 1980's?

Mergers of underwater thrifts with slightly stronger ones postponed the S&L crisis of the 1980s --- but only for a time; meanwhile, ultimate losses had increased.  Could this be deja vu? Last week, the Fed & Treasury encouraged or arranged for JPMorgan Chase to offer to acquire Bean Steans, the investment firm going down for the third time as a result of the subprime mortgage crisis.

What about good old "moral hazard"?  It's an economic axiom that people take more risk with other people's money than with their own.  Is assisting this deal by guaranteeing $30 billion of Bear Stearns' troubled subprime mortgages rewarding not only Bear Stearns & its shareholders for bad decisionmaking but also JPMorgan Chase, which almost certainly had significant exposure resulting from credit default swaps?

Of course, if you approve of this bailout, you believe that it saves the financial markets from worse problems.  But have we seen the last of struggling giants in need of government assistance?  I think not.  So where does it stop?  Is this type of deal only masking and delaying problems?  And what about the homeowners facing foreclosure?  Should we bail out the big boys and leave mom & dad in the lurch?  But wait, even on the individual mortgage level, how do we separate the real victims from speculators?

This subprime mortgage situation has so many levels of risk-shifting.  It looks like a nation-wide shell game.  Not even the experts have unraveled all the financial machinations that spun out of subprime mortgages, so we still don't know where the actual losses will reside.  And it's impossible to tell when enough government assistance is enough -- and when it simply makes a bad situation worse.

Interesting links:

"In the Fed's Crosshairs:  Exotic Game"  http://www.nytimes.com/2008/03/23/business/23gret.html

" When feds save greedy firms, economy and morality collide" azcentral.com http://www.azcentral.com/news/articles/0323biz-moralhazard0323.html

New development:  Bear Stearns shareholders complain that $2 per share is too low.  JPMorgan Chase may increase its bid to $10, but the regulators reportedly don't like that.

Link:  http://news.yahoo.com/s/ap/20080324/ap_on_bi_ge/jpmorgan_bear_stearns

(ag) March 24, 2008, in Economy, FRB