Fed orchestrates Bear Stearns bailout as attacks on workers intensify

In a speech delivered March 14 at the Economic Club of New York—a quasi fraternity of the economic elite—President George W. Bush asserted that the U.S. was going through an economic “rough patch” and asserted: “In a free market, there is going to be good times and there are going to be bad times. That’s how markets work.”

Bush has a reputation for being completely out of touch with reality, so the extremely understated nature of his “rough patch” characterization is not surprising. But the “good times” and “bad times” dichotomy he referred to has been a reoccurring theme in the capitalist-controlled press lately. It is a point that requires clarification.

For the working class in the U.S., the “good times” the president and bourgeois pundits are constantly referring to were completely illusory.

Following the official end of the last recession in 2002, job growth never returned to pre-recession levels in many areas. Wages lagged inflation throughout the entirety of the so-called recovery. The standard of living for the working class in the U.S. has steadily declined. An increasing number of workers have been forced to use credit cards and other loans to pay for items of subsistence. For the working class it has been more equivalent to one prolonged recession, dulled for a short time by a historic rise in indebtedness.

The only ones who experienced “good times” after the end of the last recession are the greedy bankers, bosses and speculators on Wall Street who sucked trillions upon trillions of dollars in profits out of the workers.

Now that the rate of profit is falling, and the bad times have arrived, it is these same bankers and speculators who are being bailed out with hundreds of billions of dollars from the U.S. Federal Reserve. The Federal Reserve, in conjunction with the Treasury Department, is attempting to systematically insulate the bankers and bosses from further profit loss.

It is the workers who are facing increasing attacks by the ruling class in the form of foreclosures, layoffs, wage decreases and cuts in vitally important social services. The ruling class is systematically directing the pain and suffering onto the backs of the workers.

The Bear Stearns bailout

At the same time Bush was delivering his platitudes to the Economic Club, the Federal Reserve was frantically devising a rescue plan for Bear Stearns, the fifth-largest investment bank in the U.S., which was on the precipice of collapse.

During the housing bubble of 2002-2006, Bear Stearns was one of the biggest players in the securitization of trillions of dollars worth of mortgage debt. Securitization facilitates predatory lending and spreads around the risk by pooling loans and then reselling them.

Its portfolios became loaded with a toxic mix of rapidly souring asset-backed securities. As the financial crisis deepened, and the collateral it had put up to get bank loans lost value, Bear Stearns was subject to increasing margin calls—meaning the bankers demanded more money or securities once Bear Stearns’ collateral sank below a certain point.

It was the liquidation of two Bear Stearns hedge funds—relatively unregulated investment pools—back in late June 2007 that first set off alarm bells about the threat that subprime mortgage defaults posed to Wall Street’s profits, and hinted at the major financial crisis that would soon follow.

By this March 14, the bank was under siege by investors who were demanding their money back, in what was the largest run on a U.S. bank since the Great Depression.

The Federal Reserve, fearing that an unchecked bank collapse of Bear Stearns’s size would trigger a domino effect of cascading bank failures, held round-the-clock meetings on the weekend of March 15-16 to orchestrate a bailout.

On March 16 they forced the sale of Bear Stearns to another investment bank, JPMorgan Chase, at the fire-sale price of $2 a share. A year ago, its stock sold for $170 a share.

At the closing bell on March 13, Bear Stearns was still the fifth-largest investment bank in the U.S. But before the U.S. stock markets opened on March 17, the entire bank had been sold for an amount less than the value of the Manhattan building it had been using for its New York headquarters.

Bigger taxpayer-financed bailouts are looming

So why did JPMorgan want to buy this shell of a bank? The Federal Reserve had agreed to advance the money JPMorgan is using to buy Bear Stearns. So, in essence, the Federal Reserve is taking the bank’s toxic portfolios onto its own balance sheet.

By bailing out Bear Stearns and giving hundreds of billions of dollars to the other big banks through the Term Auction Facility program and rate cuts, the Federal Reserve is monetizing private sector debt. In other words, it is dealing with the huge debt problem by adding to the money supply—and thus further exacerbating inflation.

Every rise in inflation is a wage cut for workers, as their take-home pay loses its purchasing power. Federal Reserve Chair Benjamin Bernanke is showering money down on the banks in a frantic effort to stop the financial contagion from spreading, and is intensifying the attacks on the working class in the process.

But even Bernanke knows there are limits to how much worthless collateral the Fed can take onto its books at one time. Bear Stearns was the first to experience a bank run, but it is unlikely to be the last. Citigroup, Lehman Brothers, and a host of other large U.S. banks are in similar predicaments.

The ruling class knows the Fed can’t bail out the entire financial system in this manner and is undoubtedly devising new ways to throw money at the banks. Future attacks on the working class are likely to take the form of all manner of new taxes, which the government will use to help finance the bailouts of the capitalist banks.

These intensifying attacks during a time of capitalist crisis can only be successfully combated through the growth of working-class solidarity. The attacks must be confronted in the streets, in cities and towns across the country by a militant multinational working-class movement demanding an immediate end to foreclosures, layoffs and wage cuts.

The billionaires are united in their war against the workers during this time of crisis. They can only be defeated by a united working class.