Time for restraint or federal intervention?
Monday was, to say the least, a harrowing day for investors.
First, Lehman Brothers, the 158-year-old investment banker, filed for bankruptcy.
Next, Bank of America announced a $50 billion plan to take over Merrill Lynch.
Finally, shares of the huge insurance company, American International Group or AIG, lost more than half their value Monday.
And, as the Dow Jones Industrial average plummeted more than 500 points, there was increasing debate about what the federal government should do to stabilize the financial markets.
The problems aren’t just in the United States. Stock markets tumbled in Europe and Asia Monday, as well as in this country.
One reason for the free fall in the American markets was the announcement by Treasury Secretary Hank Paulson the government would not step in to offer taxpayer guarantees to Lehman Brothers as it did for Bear Stearns back in March or with Fannie Mae and Freddie Mac earlier this month. Several potential purchasers of Lehman Brothers backed away, as a result.
However, we don’t blame Paulson for being cautious. As one Wall Street analyst told The Washington Post Monday, “You can’t have the government taking over everything.”
Moreover, other efforts to shore up financial institutions are under way.
The Federal Reserve Board announced plans to loosen its lending policies for banking firms. And a coalition of 10 domestic and foreign banks announced they would create a $70 billion fund to lend money to troubled financial companies.
Paulson’s restraint at this point is appropriate. But if the financial problems continue to snowball, there will be great demand for much broader federal involvement in the banking industry, and more taxpayer support for a private industry. That may be necessary in the short term, but won’t be healthy in the long run.