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I've been writing quite a bit about the gradual collapse of our systems of banking and finance over the past year, so it figures that when things finally started to pick up speed I'd be away from the Internet and unable to blog about it.

In case you somehow missed it, over the weekend, Bear Stearns, one of the largest investment banks in the world, collapsed. A few months back its stock was trading well over $150 per share. On Thursday it closed at $57 per share. On Friday, it fell to around $30. On Sunday, JP Morgan Chase, its largest creditor, bought it for roughly $2 per share. And they didn't do it alone - the U.S. Federal Reserve backstopped the sale with $30 billion in taxpayer cash and a quarter-point cut in its discount rate. (Here is a great primer for those behind on this story)

Bear Stearns survived the Great Depression, but it could not survive what is happening to our financial system today. The full effects of the collapse of the nation's housing credit bubble are only just now barely beginning to be felt, and already we have one major casualty. As I say, I'm a bit late providing analysis here, so let me instead offer up a compilation of some of the best and brightest from the past 48 hours:

Let's start with the overview from the Post:

The Fed's moves were meant to reverse a rising tide of panic that has buffeted Wall Street as banks and other institutions have found it increasingly difficult to get credit. While the steps may head off a generalized run on Wall Street banks, the central bank's intervention looks unlikely to calm the recent volatility on markets as the trading week begins....

The extraordinary measures were made necessary, in the view of the policymakers, by the most dire threat facing world financial markets in years. Bear Stearns, in particular, was confronting a run on the bank as investors were too fearful of the future to make even overnight loans to the nation's fifth-largest investment firm. If it had been allowed to fail, senior officials believed, it would have created a cascading crisis of confidence that could well have brought down several other leading firms and dragged world markets with them.

Policymakers weighed that risk against the risk that their actions would create "moral hazard," or greater willingness of companies to take inappropriate chances. The officials stressed that their efforts were meant not to save shareholders of Bear Stearns or any other company but to keep markets from collapsing.

J.P. Morgan Chase, one of the few Wall Street firms to receive only modest scars from the meltdown in the market for U.S. mortgage loans and other debt, agreed to buy Bear Stearns just two days after making an emergency loan to the investment firm. Leaders at the Fed and the Treasury strongly encouraged the firms to execute the transaction -- and to announce before Asian markets opened today -- so that investors would be comfortable doing business through the company.

Recognizing that this is still probably very opaque for most casual blog readers, here's http://www.portfolio.com/views/blogs/market-movers/2008/03/17/bear-karma
: its an old-fashioned bank run with a twist: rather than individual depositors demanding their money all at once, it was other financial institutions:

They don't take retail deposits from individuals: there's no such thing as a Bear Stearns checking account, as far as I know. But that doesn't mean they can't suffer from a bank run. Except in this case it wasn't individuals withdrawing money, but hedge funds and other banks.

Bear had a large balance sheet, full of highly-rated bonds. If it ever needed cash, it could go to the repo markets and essentially borrow money against its own balance sheet: it would sell the bonds to a counterparty, and promise to buy them back at a slightly higher price the following day or the following week.

But then, last week, the repo window slammed shut for Bear. Other banks would no longer accept Bear Stearns as a counterparty, which meant that Bear couldn't use its balance sheet to raise cash.

Then, to make matters worse, the hedge funds all started deserting Bear as well. Bear has a large prime brokerage operation: it looks after hedge funds' assets, basically, and will lend them money against those assets as needed. But the hedge funds, worried that Bear didn't have the money to lend, started moving their assets elsewhere, and Bear's highly profitable prime-brokerage franchise started spiralling downwards.

Without the trust of other banks or hedge funds, Bear was toast

Here's what Alan Greenspan had to say in yesterday's FT:

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.

Note that by saying "since the end of the second world war" what he really means is "since the Great Depression." As in, "this will be the worst financial crisis since the Great Depression."

And that's the actually a mild version of the truth. Here, in full, is Nouriel Roubini's take:

Since the onset of the liquidity and credit crunch last summer this column has been arguing that monetary policy would be impotent to address such a crunch because, in part, of the existence of a non-bank "shadow financial system". This system is composed of conduits, SIVs, investment banks/broker dealers, money market funds, hedge funds and other non bank financial institutions.

All these institutions look similar to banks because they are highly leveraged and borrow short and in liquid ways and invest or lend long and in illiquid ways. This shadow financial system is, like banks, subject not only to credit and market risk but also to rollover or liquidity risk, i.e. the risk deriving from having a large stock of short term liabilities (relative to liquid assets) that may not roll over if creditors decide to withdraw their credits to these institutions.

Unlike banks this shadow financial system does not have access to the lender of last resort support of the central bank as these are not depository institutions regulated by the central banks. What we are now observing - with the case of Bear Stearns and the recent disaster among SIVs, conduits, run on a number of hedge funds and money market funds is a generalized liquidity run on this shadow financial system.

The response of the Fed to this run has been radical and in the form of the extension of the lender of last resort support to non bank financial institutions. Specifically, the new $200 bn term facility allows primary dealers - many of which are non banks - to swap their toxic mortgage backed securities for US Treasuries; second, the Fed provided emergency support to Bear Stearns and following the purchase of Bear Stearns by JPMorgan, is now providing a $30 bn plus support to JPMorgan to help the rescue of Bear Stearns; finally, now the Fed is allowing primary dealers to access the Fed discount window at the same terms as banks.

This is the most radical change and expansions of Fed powers and functions since the Great Depression: essentially the Fed now can lend unlimited amounts to non bank highly leveraged institutions that it does not regulate. The Fed is treating this run on the shadow financial system as a liquidity run but the Fed has no idea of whether such institutions are insolvent. As JPMorgan paid only about $200 million for Bear Stearns - and only after the Fed promised a $30 billlion loan - this was a clear case where this non bank financial institution was insolvent.

The Fed has no idea of which other primary dealers may be insolvent as it does not supervise and regulate those primary dealers that are not banks. But it is treating this crisis - the most severe financial crisis in the US since the Great Depression - as if it was purely a liquidity crisis. By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbate moral hazard distortions. Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts. This is a most radical action and a signal of how severe the crisis of the banking system and non-bank shadow financial system is. This is the worst US financial crisis since the Great Depression and the Fed is treating it as if it was only a liquidity crisis. But this is not just a liquidity crisis; it is rather a credit and insolvency crisis. And it is not the job of the Fed to bail out insolvent non bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages.

Krugman agrees:

Nouriel is right: this is the worst financial crisis since the Great Depression, and the Fed, with the best will in the world, probably lacks the tools to deal with it. Broader action is necessary.

But then comes the question: who ya gonna call?

The Gang That Couldn't think Straight still holds the White House; no good ideas will come from that quarter. Worse, Incurious George would probably veto any sensible plan from Congress, even if said plan could get past a filibuster.

Hey, here's an idea! Let's create a nonpartisan expert commission, headed by Alan Gr .... oh, wait. He's part of the problem. In fact, is there any way we can repossess his book royalties?

Seriously, it's very hard to see who can take charge.

Things fall apart, and the center doesn't exist.

Megan McArdle looks at the impact the Fed's actions might have:

Now that it's happened, we can breathe a sigh of relief that one gigantic disaster has been averted. Libertarians and liberals arguing against the Fed's role in all this sound to me either ignorant or psychotic. The credit markets are already badly malfunctioning (yes, I was wrong). Bear Stearns is the counterparty to a huge number of transactions. Allowing it to fail would have been like throwing a hand grenade into a burning pool of gasoline; bankruptcy proceedings are time-consuming and uncertain. JP Morgan has the ability to assume their risks without any danger of going under themselves; that's very good for the markets, and by extension, us.

Yes, this is creating moral hazard that we'll have to deal with, probably unpleasantly, down the road. But whatever the moral hazard, it is hard to see how it could be worse than the full-blown financial crisis the Fed is trying to avert

More Megan McArdle:

There's a certain amount of moral outrage floating around in the punditocracy, looking for a solid target. The implication is that someone, or at least some small group of people, must have done this to us in the course of feeding their insatiable greed. I'm sure there will be a post-mortem in which some reporter will tell a very convincing story about how this could all have been averted if only someone had Made A Rule. It may be Bear's managers who should have done it, or the Fed, or the SEC. I don't know who the culprit will be, but I am very sure that everyone else will be very sure that Someone could have (and should have) prevented all this.

Before we enter into the orgy of blame, I'd suggest that that someone was everyone, almost. Crazy Asian people who thought America was some sort of Miracle Market sent us more money than we needed for investment, inflating an asset price bubble. The Federal Reserve, complacent after more than twenty years of tame inflation, added a little kerosene to an already blazing fire. Silly people decided that real estate prices would continue rocketing upwards forever, and took on ridiculous mortgages that they had no reasonable hope of paying off. Idiot bankers thought that their enormous brains, raffish good looks, and advanced computer models had enabled them to conquer risk....

But while the bankers are in some sense the most directly culpable, they didn't behave in any fundamentally different way from millions of their fellow citizens. There were incredibly unwise decisions all the way down the chain from lenders to homebuyers, and each of those bad decisions was necessary to create the current mess. We're witnessing the ugly denoument of a sort of folie-a-millions.

And just to be thorough, more McMegan:

I am not the sort of libertarian who thinks that any and all financial intervention by the government is definitionally a bad idea. I am in favor of the Federal Reserve. I am the lone defender of the FDIC at libertarian events. I have been known to find kind words for the SEC. So I am not, in principle, opposed to this sort of bailout on the grounds that this is not the government's job.

Liberals like Paul Krugman and Kevin Drum are up in arms about the notion that the financial sector is privatising benefits while the public sector is taking on all the risk. They are looking for a way to make the bailout hurt for the bankers.

Readers may be surprised to learn that I basically agree with them. The bankers who decided that they had repealed the law of averages should suffer. A lot. Every time they get on the jitney to the Hamptons, I want them thinking "Did I leave the uncovered credit risk on?" Many of them should lose all their money pour encourager les autres. This is not about bailing out Wall Street; it's about bailout out us.

As with the people who took out unwise mortgages, I am in favor of having the government make strategic interventions to shore up the markets, but I think that they should make it hurt. No one who took excessively risky behavior--even if they honestly didn't realize it was excessively risky behavior--should escape without getting spanked, hard. Pain is nature's way of saying "Don't do that!", a lesson that apparently a lot of us needed to learn.

There will still be some sort of moral hazard, I think (though the mysterious knzn does have a point), in that bankers will not be as cautious about systemic risk as they should be. Alas, we live in an imperfect world, and the price of preventing catastrophes is that you will have more of them to prevent. Ultimately, that's a price I'm willing to pay. And I think you should be too. The people screaming that we ought to let the banks fail don't seem to realize that they, too, can be thrown out of work in the resulting hideous recession.

In the case of the employees and shareholders of Bear Stearns, I think they're probably hurting just about right; most of the Bear Stearns bankers will lose their jobs, and most of the shareholders will lose their shirts. This is as it should be.

When even a principled libertarian begins arguing for serious federal action, you know that you have a very, very serious problem on your hands. And although I agree with Megan on this, that doesn't mean that John Cole's rhetorical point isn't without merit:

Bailouts suck. The GOP should do something about welfare moms with widescreen televisions and Cadillacs.

The fact that this bailout was necessary doesn't make it any less of a taxpayer-funded handout. And yet the very same people who favor corporate bailouts are often the very same people who oppose personal ones.

Before we get to the more general lessons to be learned here, however, one more prediction, this time from Paul Krugman and via Swampland's Jay Carney:

"I think we know more than we did then, and just the fact that we have a big federal government is a stabilizing factor," Paul Krugman of Princeton (and the New York Times) tells Fortune in a lengthy interview about the crisis. "But the current problem is still pretty awesome." Krugman's predictions: recession at least until mid-2010, $1 trillion in losses on mortgage-backed securities and 20 million Americans with negative equity in their homes. And yet, he allows that the crisis in the financial markets may not devastate Main Street as much as Wall Street. "Maybe it'll turn out that all this Wall Street stuff is just less important than we think it is," he says. Let's hope so.

Now on to the political lessons to be learned.

First, Publius:

There is a larger point here -- one unrelated to McArdle (again, I liked her post other than that one sentence). One of the more frustrating challenges the progressive movement faces is that the public is blind to the various and often invisible ways that government has improved people's lives. For instance, I doubt "small government" advocates spend much time thinking about why the public currently enjoys free schools, clean air, weekends, subsidized roads, Social Security, non-contaminated food, etc. All of these benefits, though, resulted from government action following intense political battles.

This is getting way beyond Bear Stearns, but the quickest way to shatter the current Reagan paradigm is to rehabilitate the idea of government in the public's mind. Indeed, one of the long-term costs of Bill Clinton's political strategy of the 1990s was that it implicitly discredited the benefits of government action. I don't blame him - he did what he had to do under rough circumstances. But to really shift the paradigm for good, progressives need to make the public understand that government can and has been a force for good (when it's done right, obviously).

Thus, if the government has acted to help the markets here, we should say so. Unapologetically.

One of Kevin Drum's readers puts it more directly:

One of the things that shocks me is that the liberal blogosphere has been deadly silent about the massive bailout of bankers that is taking place with taxpayer money, and fueling the collapse of the dollar. Where's the outrage? What we're seeing is a classic example of "Privatize the gains during the boom -- e.g. hand out $30B+ in Wall Street bonuses each of the last several years -- and socialize the losses during the bust." But for this to be taking place in the context of a financial apocalypse among the American middle class (9m families currently have negative equity in their homes, and prices in all likelihood have much further to fall) strikes me as bordering on criminal. Why aren't the Democrats demanding the re-regulation of Wall Street and the reining in of compensation in the finance industry as quid pro quo for these bailouts?

And here's Matt Yglesias' take:

As I said before, I don't necessarily have a problem with the government intervening to help stabilize the financial markets if that's what's necessary for the economy. There's no sense letting a sense of spite directed at the wizards of high finance get in the way of doing what needs to be done. But surely Democrats could seize this opportunity to make the case for the rest of the social contract. After all, it was just a couple of months ago that the GOP was blocking efforts to temporarily increase food stamp benefits and extend unemployment insurance and doing so in the name of free markets and moral hazards.

It's preposterous. This is the time to be making the case for progressive taxation and for a safety net that works for the broad mass of people, not just a selective one for people who reap the windfall during boom times and then walk away from losses when things go bust.

For now, the problem is that people aren't quite aware of how what is going on will impact their daily lives. Until that connection is made, political progress is impossible. But it is only a matter of time (I'd guess 6 months to a year) before those connections are made, and once they are, it will be time for another political/policy revolution.

That's why I think this objection from TPM Reader SW misses the mark:

I am appalled, though not surprised, at the complete silence by the candidates on the last few days' events on Wall Street and the world's stock, bond and currency markets. This has far more effect on all of our futures than racist comments by the oxygen deprived brains of some old political or spiritual leaders. I know why Clinton and McCain are not talking about it: too many of their biggest supporters had too much to do with what happened, and benefited from the deregulation of the past twenty years for which both (and their allies) had a great deal of responsibility. (Remember that Hillary stood by while her colleague Chick Schumer killed the bill to tax hedge fund managers, who ear scores of millions every year, at income, rather than capital gains, rates.) What about Obama? Is he not up to the task of educating people about what the repeal of the Glass-Steagall Act did to the markets many Americans poured their retirement and college savings into? Does he know that the Federal Reserve is about to bail out bankers, investors, and outright thieves who helped drive down the dollar, and brought the credit markets to a near standstill? Does he understand the problem? I wouldn't know.

Seventy years ago Franklin Roosevelt was able to explain this country's and the world's financial crises to a far less educated, and less accessible, American public. That today's candidates are unwiling, or unable to do so, is alarming. Maybe if the media first tried to understand the problems, then asked the proper questions until answers were forthcoming or it was clear the candidates are afraid to ask them, political coverage would be more than the extreme sports coverage it has turned into.

FDR's banking speech, a speech that would later be known as his first Fireside Chat, is to my mind one of the most important moments in presidential rhetoric. Rarely can a single speech change the course of history, but in this case it really did. But we must always remember to keep this speech in context. FDR delivered it on March 12, 1933, nearly three and a half years after the collapse of the stock market that most historians consider to be the start of the Depression.

As I said above, until people feel the pain themselves, this is something about which they will neither care nor understand. There will be time for such a speech, but that time is not now. Things will have to get much, much worse before they can get better.

As to why so many financial experts could miss this ongoing collapse while so many of us lowly bloggers saw it coming, I think Atrios nails it here:

I was thinking about the housing bubble and why most of the "experts" failed to see that there was a problem, and I realized it's because they're all rich. There was one unavoidable and obvious fact that was apparent to anyone who isn't especially rich, and that's that there was no possible way that many households in this country had large enough incomes to be able to afford the monthly mortgage payments they were supposed to be paying, even without ridiculous interest rate resets. There just aren't enough people who make enough money to support that many $800,000 homes.

This problem extends well beyond our financial system to our political system as a whole. Our entire discourse, both official and unofficial, is dominated by financially secure elites who have no understanding whatsoever of what life is like for most of their readers.

For now, I'm going to give McMegan the last outsourced word.

So the left wants me to admit that the current meltdown means that we need oodles more financial regulation, and maybe the death penalty for being a rich idiot. The right wants me to admit that if we don't allow warrantless wiretapping, it will be harder to catch terrorists.

In the case of the latter, I concede that possibly they are right, as I am certainly no expert. But the purpose of catching terrorists is to make Americans better off. I am suspicious of the notion that we make Americans better off by giving the government broader spying powers.

In the case of the former, I also concede that a regulator might have prevented this--though take a long, hard look at government pension funds and their penchant for taking fliers in the derivatives market before you posit an all-wise regulator. But the regulator that would have stopped this would almost certainly have done so by being very, very conservative about new transactions--which would have stopped this, and a lot of things we like, like higher economic growth. There is no free lunch in regulation.

These two things are essentially flip sides of the same coin for me. Government powers come only at enormous cost: to liberty, to community, to the economy, and of course, the financial burden of paying for them. In some cases they are necessary. But pointing to a problem and noting that it exists is not an automatic warrant for me to smash it with the hammer of the state.

I for one wouldn't mind the trade-off implied above in bold. Why must everything give way to higher levels of economic growth? I realize this will sound heretical to most of my US readers, but economic growth in and of itself is not the be all and end all of civilization. For the past half century or so we have surely acted as if it is, but that doesn't answer the question. Perhaps it is time once again for us as a nation to rethink our unending obsession with economics. Aggregate growth tells us nothing about the lives of individual citizens. It tells us nothing about the lives of the families that make up this nation. Dollars and cents are part, but only part, of what makes our nation a success.