The justification for public intervention to save Bear Stearns was that failure to do so would have wrecked the derivative market. Bear's counterparties would have had no one to fulfill their contracts. Everyone would have to monitor credit risk. Cats and dogs would start living together. Etc.
No one supported the bailout more than the Economist. But their latest leader points out that the problem does not exist for futures or less exotic securities, because these are traded on exchanges, and the exchange is the counterparty. It monitors the credit worthiness of those who get to trade on it. If derivatives were traded the same way, then the problem wouldn't exist. The Economist claims there are problems with this, since some derivative contracts are too specialized to provide for a liquid market.
But if Bear had gone down, then the participants would just have to balance the pain of monitoring the creditworthiness of their over-the-counter counterparties vs. the loss of specialization of participating on an exchange. Bear's failure would be a signal that credit risk was a bigger deal than everyone had thought. But that was just the right signal.
The Fed's intervention exposes the US taxpayer to big losses, increases moral hazard and will inevitably mean a lot of costly regulation. Sometimes it's just time for a bear to die.
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