So now that we understand Bear Stearns’ business a little better we can now look at the two opposing arguments as to whether or not the government and/or the Federal Reserve should have gotten involved in trying to save the firm.

The first argument basically goes that the bank and the financial markets got themselves into this situation so they should be the ones who get themselves out of it. There are two parts to this argument:

1. When the government intervenes it is normally the taxpayer that gets stuck with the problem which in these types of cases can mean very large losses that taxpayer money makes up for. So the first part of this argument is why should taxpayer money be used to bail out a financial institution that created their own problems which the taxpayer had nothing to do with?

2. When the government intervenes it creates something which is known as moral hazard, which makes a similar or worse situation than you have just bailed out more likely to happen in the future. Moral Hazard is a situation where individuals and companies are more reckless than they normally would be because history has shown that if they screw things up too bad then someone will come along and save them. So the argument here goes that because history has shown that the government will bail these large institutions out when they get into trouble, they act more recklessly than they otherwise would, making a crisis like this or even worse more likely to happen in the future.

The other side of this argument which we began to look at in part two of this series is that if a financial institution of this size is allowed to fail, especially in the current environment where things are already on edge, then the whole financial system will come crashing down on itself. There are basically two sides to this argument as well which are:

1. If this where allowed to happen then the problems would not be contained just to the financial institutions who got themselves into this mess, but would also drastically affect the economy for the worse, and therefore the average citizen would be affected as well. So the argument here goes that government and/or Federal Reserve intervention is warranted because the consequences and hit to the average taxpayer of letting an institution that is this intertwined into the financial system fail would be much more drastic than the bill for any action.

2. The second argument here in this particular case, is that the bank is now effectively out of business, a lot of the employees are going to loose their jobs, and billions of dollars have been lost in shareholder wealth so the danger of a moral hazard of any consequence being created as a result of the bailout is relatively limited.

There are many debates surrounding the above issues and you can expect to see this in the news for many months if not years to come. As this is the case we will be actively following and discussing the different points in the debate in the subprime learning center at InformedTrades.com so we hope to see you there.

That completes this video. In our next video we are going to look at just how the government did intervene in this instance with a look at the days leading up to the fall of Bear Stearns. This is where it really gets interesting so we hope to see you in our next video.

As always if you have any questions or comments please leave them in the comments section below, and have a great day!