Krugman has good perspective on Bear, Stearns (“If you can keep your head when all about you / are losing theirs and blaming it on you…”)

When push comes to shove, financial officials — rightly — aren’t willing to run the risk that losses on bad loans will cripple the financial system and take the real economy down with it.

Which is actually re-assuring to me; I don’t live in the financial economy at all; I live in the real economy.

Consider what happened last Friday, when the Federal Reserve rushed to the aid of Bear Stearns.

Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”

Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.

Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.

So, Bear got culled and devoured by JP Morgan (much as Spitzer may gotten culled). Interesting.

But the Fed rode to Bear’s rescue anyway, fearing that the collapse of a major investment bank would cause panic in the markets and wreak havoc with the wider economy. Fed officials knew that they were doing a bad thing, but believed that the alternative would be even worse.

As Bear goes, so will go the rest of the financial system. And if history is any guide, the coming taxpayer-financed bailout will end up costing a lot of money.

Part of me says fine! I don’t have any! Then again, I’m not (yet) able to grow all my food on my eighth of any acre, so not having “any” means only having a small amount…

[T]he big bailout is coming. The only question is how well it will be managed.

As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.

According to late reports on Sunday, JPMorgan Chase will buy Bear for a pittance. That’s an O.K. resolution for this case — but not a model for the much bigger bailout to come. Looking ahead, we probably need something similar to the Resolution Trust Corporation, which took over bankrupt savings and loan institutions and sold off their assets to reimburse taxpayers. And we need it quickly: things are falling apart as you read this.

But who, exactly, do we trust to put things back together?

1. Not Bush. He’s now at what? 20%? With nine months to go? We could solve this problem by impeaching Bush and Cheney immediately, as would be more than justified. President Pelosi has a nice ring to it. And if the Democrats had spent last year relentlessly and methodically building a case for that, instead of sucking, that might even be possible. Oh well.

2. Not Bernanke or the Fed, apparently, or at least so far. And somehow I doubt that bringing Greenspan back is going to help, since he’s so associated with bubbles to begin with.

3. Not the bankers or the brokers or the financial class. Obviously.

4. Not Richistan.

5. Not, in fact, most of our political class, who seem to be good for nothing but lying and stealing. And the press is so corrupt, it’s almost impossible to get a read on what’s really happening (unless you can pay for information and perhaps, now, not even then). I’m going here on my experience with the News section, but I assume that the financial section is as bad if not worse.

It’s not a matter of this or that strong Leader stepping forward [pause here to pray to The God(ess)(e)(s) Of Your Choice, If Any]. It’s as if eight years of Conservative misrule have acted like a neutron bomb to destroy confidence in all our institutions. And now, quite sensibly, none of the Wall Street Boys trust each other, and, equally sensibly, none of them trust the institutions their own ideology sought to destroy.

I keep coming back to the old classical idea of nemesis…

NOTE Obviously, I don’t want a President who is part of the Conservative Movement that brought this Clusterfuck on us, or anybody who wants Unity with it. Nor do I want a President who has any downside risks at all—there are quite enough downside risks for me to cope with, at present.

UPDATE What Jerome a Paris said (in part of Kos not affected by mindrot):

It’s time to move beyond the old adage “if you keep doing the same thing and expecting different results, you’re either insane or an economist” to note the hard, painful truth: they’re not expecting different results, they’re getting exactly the results they wanted: massive wealth and power increases at the top, at the expense of everybody else.

[Greenspan’s ] article is the most explicit ever call for that age old principle: privatise the profits, socialise the losses. Why is that man still listened to? Oh yes: because the only public that matters are those on the privatised end of that sentence.

UPDATE See Krugman, “Things fall apart; the center doesn’t exist.”