Bernanke on the Rescue of Bear Stearns

Fed Chairman Bernanke testified before the US Joint Congressional Economic Committee that they had little choice but to rescue Bear Stearns:

Bernanke said that because the financial system is so interconnected, the sudden failure of Bear Stearns could have led to a "chaotic unwinding of positions" that could have shaken already fragile investor confidence and further undermined the economy.

A disorderly collapse could also have cast doubt on the financial positions of other firms that did business with Bear, he added.

"Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain," Bernanke said.

"Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability."

My thoughts on that Monday, when the world came close to disaster is quite clear. I agree with the position of the Fed. Had they not acted would have sent markets spiraling out of control. It may or may not have been the nail in the coffin but it could have been the catalyst to an economic crisis that would have been far more difficult to contain, much less, untangle.

free-market economists are communists in disguise?

interesting wallstrip interview. Lindsay sits down with Barry Ritholtz.

Oil to Rise to US$100 by Year's End?

"Oil at US$100?" asks Forbes.com Video Network.

(sorry, they don't have an embed video so you'll have to visit the link to view the video).

Market Forces: Is it Flawed?

Reuters has an interesting interview where Nobel economics winner says market forces flawed:

In its statement with the award, the Royal Swedish Academy of Sciences said the market's efficiency may be undermined because consumers are not perfectly informed, competition is not completely free, and "privately desirable production and consumption may generate social costs and benefits."

"Markets work well with goods that economists call private goods" like cars or other consumer durables, Maskin said in his office at the Institute for Advanced Study in Princeton, New Jersey.

"If I buy a car, I use the car, you don't and the market for cars works pretty well. But there are many other sorts of goods, often very important goods, which are not provided well through the market. Often, these go under the heading of public goods," he said.

"How do we ensure in the case of public goods that they are provided at all, and that they are provided at the right level, taking into account citizens' preferences?" he said.

A clean environment, for example, is not a private good in that "my enjoyment of it doesn't preclude yours," he said.

"So the theory of mechanism design asks what sort of procedures or mechanisms or institutions could be put in place which allow us to choose the right level," he said.

Those mechanisms could include taxes to allow the more efficient provision of public goods, he said.