I wrote here a while back about what has really been happening over the last few months is a run on the shadow banking system, a kind of non-bank bank run. If that’s true, you can see why some are arguing that deposit-taking institutions have been able to find succor in the arms of the Feds, while non-banks — i.e., Bear Stearns — have not had that luxury.
The upshot? You could credibly argue that having allowed loan syndication to wildly expand the total amount of credit in the U.S. economy, to the benefit, for the most part, of all of us, the non-bank banks were dropped out at the first sign of trouble last summer. By cutting rates and not providing direct support to the brokers, the Fed essentially let the non-bank banks fall on their swords.
Buy any of that? I do, to some extent. The real issue is the backwardness of the monetary and financial regulatory system in the U.S. The current system, with its Fed support for traditional deposit-taking institutions, creates distortions, which is the way things go, but most of them favor the incumbents.
Of course, does that mean the Fed should go around bailing out banks and non-banks alike? Of course not, but then again the current system is uneven in its unfair, market-distorting impact. For crying out loud, at least have the decency to be uneven-handed in an even-handed way.