New column: Bernanke walks the line between bailout and bust

We know how this is going to turn out. Either the system struggles through, largely on its own, or Bernanke bails it out. We have too much real time information on hand today for the Fed to not know when action is necessary.

Let me ask this: so why not bail out the financial system? At least, after a certain amount of pain. I understand the sense of outrage at those who got us into this situation (in reality, we are the people our parents warned us about), and I understand that he's acting in moderation so the system doesn't come to expect a bailout the next time. But why can't we expect an FDIC-like organization to start safeguarding more of the financial system? Certainly with hedge funds a big problem is the lack of public information, but how about a horse trade - greater disclosure for greater protection? Would it fly?

Peter : the "I" in FDIC stands for "insurance". You just can't insure financial instruments, each of which is a unique combination of just two basic components : 1) Risk and 2) Reward. It would be like having sodium-less salt, roughly... Yep, that's called chlorine. It would, in a fairly short time, create a massive, moral hazard-induced imbalance, which would lead to a far bigger crisis. Think of 1998 in Russia or 2001 in Turkey, but bigger.

Experience has showed that safeguarding the financial system means enforcing guidelines rather than detailed regulations, which breed distortions and perversely create new, much more dangerous risks. However, local (read : national) legislative and regulatory bodies are loth to give up their petty powers and thus the financial system, however global it has become on the face of the planet, stays riddled with pockets of locally-created imbalances.

The present crisis was caused by insufficient consumer protection rules on mortgages in the US, a fundamental conflict of interest at the rating agencies, which no one really regulates, and over-easy monetary conditions on the dollar market since September 2001. In an ideal world the supervision of consumer finance, the supervision of the rating agencies and the setting of monetary policy would all be under the umbrella of one multinational institution. Central Banks are trying modestly to get closer to there, through the "Basel II" capital adequacy program which sets capital/risk adequacy rules worldwide for banks, but it is a slow and partial process, widely resisted by national governments, not least the US.

Bernanke may be George Bailey, but he's no J. P. Morgan.

No safeguards are needed for investors.