Question

As you may have read, in 2008, the U.S. Federal Reserve Bank (The Fed), fearing the financial collapse of Bear Stearns, a major investment firm, engineered its sale to another Wall Street firm. In order to facilitate the sale, The Fed, guaranteed the value of almost $30 billion worth of Bear Stearns investments, much of which were based on questionable real estate loans. Many of those who questioned the appropriateness of the Fed's actions asked why it chose to "bail out" a large investment bank, at the possible expense of U.S. taxpayers? At the same time, others asked why the Fed had not instead chosen to guarantee $30 billion of home mortgage loans of individual homeowners facing foreclosure on their sub prime home loans? What ethical reasons would you give for choosing to bail out homeowners over Bear Stearns or Bear Stearns over individual homeowners? Does ethics even enter into it? Is this simply a business decision with no ethical ramifications to it at all? What do you think?

Answer 1

I would prefer choice of bail out to Bear Stearns over individual home owners. However this decision cannot be based on ethics only. Any bail out to the tune of $ 30 billion ought to involve cautious approach and be a prudent business decision. If individual home owners are choosen to bail out, it may further lead to risk of default by other homeowners as they may see bail out as a solution to their problems. Then, many other investment banks may face the situation like that of Bear Stearns. To, bail out Bear Sterns is a strategic business decision, as the Federal bank bail out pass through another Wall Street firm instead of direct bail out. Ethically we can say that tax payers money should be used for their apparent benefits like building roads, providing better health services, better education etc. , but on the other hand to take measures to prevent economy from any financial crisis, is also duty of the governments which the governments performs through their central banks. When Federal bank decided to bail out the Bear Stearns from bankruptcy and decided to pump liquidity sounds to be an ethical decision to save one of the largest investment bank of the time. However to position bail out through another Wall Street firm is a business decision. I think it is a right decision because no strategic decision which involves huge amount of tax payers of a country could be based on ethics alone nor it could only be a business decision alone, without involving ethics into it.