Free Bailout Nation by Barry Ritholtz Page A

has some degree of curative properties, as large piles of money often do. We learn of errors and problems fairly quickly, but usually some measure of victory is declared. Minor abuses come to light—a little fraud here, some oversight snafu there. These are par for the course, and mostly ignored.
    Without fail, the unintended consequences of the bailout begin working their way through the system. The repercussions are felt years and even decades later.

    W e have seen this exact pattern with the various industrial bailouts of the 1970s and 1980s, the savings and loan (S&L) crisis of the early 1990s, and the Long Term Capital Management (LTCM) crisis of 1998. More recently, the tech wreck of 2000-2003, the credit crisis, the derivatives disaster, and the housing collapse all went through similar phases.
    Each of these events followed the usual progression. Indeed, all of the current bailouts are repercussions—the step 10—of previous bailouts.
    And we have yet to learn the unintended consequences of the credit crunch bailout, the housing rescue plan, the American International Group (AIG), Citigroup (C), Bank of America (BAC) rescues, the General Motors (GM) loans, or the Fannie and Freddie conservatorship. We seemed to be rushing headlong through steps 1 through 9; step 10 is off in the future.
    But rest assured, we will discover, as we always do, some terrible repercussions down the road. They will be substantive and substantial—and very, very expensive.

Part II
    THE MODERN ERA OF BAILOUTS
    Source : By permission of John Sherffius and Creators Syndicate, Inc.

Chapter 5
    Stock Market Bailouts (1987-1995)
    The essential Greenspan legacy . . . is the idea that the Fed will allow nothing to go really wrong.
    â€”James Grant, publisher of Grant’s Interest Rate Observer 1
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    S o far, we have looked at various interventions—in the economy (1930s); in individual companies (Lockheed, Chrysler); and in entire sectors (banking). The next step on our path to becoming a Bailout Nation was when we went beyond any given company or sector bailout. We moved into uncharted territory when the U.S. Federal Reserve began intervening in the entire stock market.
    Of course, the Federal Reserve has indirectly impacted all markets by performing its ordinary duties: maintaining price stability and maximizing employment. The Fed engages in a variety of targeted actions, such as changing interest rates, adding or subtracting liquidity, buying and selling Treasuries. These all have an impact on the markets, for better or worse. But that impact is incidental to the operations of the Fed’s normal central banking activities. The results are a by-product, not the goal of the central bankers.
    Where investors—and taxpayers—should become concerned is when the Fed goes far beyond ordinary central banking operations and seeks to maintain or support asset prices. This is a slippery slope, and, as we shall see, it leads to consequences that have been utterly disastrous.
    How the Federal Reserve morphed from a lender of last resort to a guarantor of asset prices is a long and tortured tale. We will skip most of the boring history, and instead focus on the era dating from the 1987 crash forward. Traditionally, the Fed’s mandate has been to “foster progress toward price stability” and to “promote sustained real output growth.” For our purposes, let’s call these fighting inflation and smoothing out the excesses of the business cycle.
    Change came to the Fed in the form of a new Federal Open Market Committee (FOMC) chairman. Alan Greenspan took the reins in 1987, and he radically broke away from his predecessors’ philosophies. Under the new chairman, FOMC policy incrementally moved toward supporting asset prices. As so often happens with these things, it began with a major disruption. In Greenspan’s case, it was the 1987 market crash.
    Initially, 1987 was a good year for