LEDYARD, Conn. — Really it was only one government bail out–Bear Stearns–but to hear it from these economists, it might sound like two different stories.
Members United's resident economist Nick Perna said that Bear Stearns "was a relatively small cog in the financial wheel…but if it had been allowed to go under, there would have had a number of innocent firms go under as well." That would have been a high-risk proposition so the Fed really had no choice, he estimated.
On the other hand, Kevin Hassett, economic adviser for two presidential campaigns, stated, "Bear Stearns was the biggest policy mistake in a generation." Not only is there a sense that these large brokerage firms are too big to fail, but now the government, politically, has to make peace offerings to subprime borrowers as well. "If you can bail out Bear Stearns, why not mom and pop?" is the attitude.
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Not bailing out Bear Stearns would have been painful, Hassett said but more prudent in the long run.
Hale called the entire subprime mortgage lending process, and subsequent securitizations, "grossly criminal conduct."
Perna said the Federal Reserve should have provided more regulatory pressure to keep the banks from going too far.
Hale interjected that credit unions are a "totally different culture" from banks, which kept them out of this problem, though they are not without challenges stemming from it.
The three economists agreed that leveraging, which the banks used in an effort to chase higher yields, and bringing capitalization to reasonable levels is the remedy.
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