Does the loan to Bear Stearns give the Federal Reserve of NY and JPM Chase rights to their assets? What is the real risk of loss for the Fed and JPM?

Even if the B&S’s place of business in Manhattan were all that’s at stake something real can be gained for a mere abstract creation of credit.

You should know, Bear Stearns is technically bankrupt, they have a negligible capital base and a horrible inventory of assets and when they are unable to repay this loan ultimately they will surrender their worthless assets and the Fed will absorb the loss. You can compare it to a sub-prime loan — are the banks going to recover all their loses from the seizure of foreclosed homes? Of course not, and neither will the Fed. Bear Stearns is not suffering from a liquidity problem, they are suffering from a solvency problem, as are many other financial institutions.

The only thing I would add to DJR’s comment is the concept of fractional reserve banking — the exact amount of new money that will be pumped into the economy as a result of this “loan” or any other is definitely not a simple calculation, but if anything it will likely be greater than $666 per American, rather than less.

But the first comment is ALOT closer to the point when it comes to today’s bailout of Bear Stearns. The ultimate collateral for the loans the Fed is making are the hugely devalued assets of Bear Stearns. The Fed is very unlikely to be repaid anything like in full. So the lending to Bear will be inflationary.

The effect on inflation is, however, the least of this scheme’s evils. Far worse is the moral hazard it reinforces and the perversion of the fed’s mandate. The Fed’s proper role is to encourage price stability and full employment. To some extent this would support the Fed’s role in preserving the smooth functioning of capital markets.

Traditionally the Fed has been relied upon along with the FDIC and OCC to regulate commercial banks and to protect the interests of depositors of commercial banks. Today’s bailout of Bear Stearns (engineered as it was with JP Morgan Chase as an intermediary) is just wrong. Both because the main beneficiary’s of this action will firms that lent to Bear Stearns and (probably to a lesser extent) the shareholders and managers of Bear Stearns). These parties should not be protected. They should lose their respective investments, lending, jobs, salaries and bonuses.

Some will argue that allowing Bear Stearns to fail would destabilize the capital markets. This is nonsense. Bear Stearns isn’t that big. In fact, letting it fail might be a first step to institutions being able to calculate and then start to come clean about the true value of their holdings. That would initially cause some serious turbulence. But it would allow markets to function again faster than they will with zombie firms like Bear Stearns (and Heaven only knows how many others) to stagger around distorting the financial landscape.

The corporate socialists will claim that letting Bear Stearns or any financial institution fail will bring us back to the depression. In fact, the wisest course of action the government, the Fed and others could steer would be to ensure that explicitly federally insured deposits and investments are protected. The rest – including loans to and investments in financial institutions (even Freddie Mac and Fannie Mae) should be fall to their true vlaue, which, in many cases, will be zero.

Another piece of Fed inspired stupidity that seems to be making the rounds is for the Fed to accept as collateral for lending to commercial banks failing mortgage loan portfolios. If the lending is made against a rigorous mark to market assessment of the value of those portfolios, it is sensible. But you can bet that the Fed’s hair-brained scheme will take the portfolios at their (vastly inflated) face values.

You either have little knowledge of economics, or are being
deceitful to advance an agenda. Sorry if this sounds harsh,
but you are needlessly sensationalizing a story you don’t
appear to have much understanding of.

Printing money and lending it does not directly correspond
to taking the same quantity out of each American’s pocket,
not in this case.

For one, the loans are backed by assets. Even if the money
is not payed back the transfer of assets will bring the
money supply back to balance.

Two, once the loans are payed back, the money supply is back
to where it was before the Fed stepped in.

Three, the amount of money that /does/ come out of each
American’s pocket is a function of the inflationary affects
this induces on the economy. You simply cannot divide $200
billion by 300 million people and say that’s how much this
bailout has cost us. It’s much more complicated than that.
And if this is truly a loan, and not a handout, then there
should be minimal inflationary pressures.

Generally I share your outrage at bailouts, but if this
is going to be an extremely short-term Fed measure, and
the loans are being backed by assets, and there is every
expectation that the loans are going to be repaid, then
this is probably a wise decision. It appears that there
is currently a temporary meltdown in the willingness of
the financial market to lend. If this does play out to be
a short-term phenomena that is primarily psychological
then the Fed move is appropriate. If this is more than
just a temporary psychological phenomena, however, but a
structural correction, then the Fed is just delaying the
inevitable, which will just make the correction draw out
over a longer period. Time will tell how deep of a hole we
have dug ourselves into, but it’s too early to go around
screaming that the sky is falling just yet.