Washington is in a bailout mode following the Fed's bailout of Bear Stearns on March 14 and the Treasury's standby authority to bailout Fannie Mae and Freddie Mac, codified in H.R.3221 enacted on July 30.  Is the auto industry next?

Just as students are about to apply for their loans for next fall, many lenders have stopped making student loans. This week, two of the largest, Citicorp and Bank of America, pulled out. Higher educational institutions are rapidly switching back to direct loans from the government, but the Department of Education may be swamped despite the fact that no student has been denied a loan yet and despite DOE's claims that it's ready to make loans that private lenders won't.

Sallie Mae's CEO Albert Lord wrote two days ago in Wednesday's quarterly earnings report, "Today's environment is the most difficult we have seen in our 35-year history of student lending. It has become obvious that we can only meet the enormous student credit demands we are seeing at Sallie Mae if there is a near-term, system-wide liquidity solution."

Yesterday afternoon, the Senate cleared the way to pass a $14.9 b. housing stimulus bill, H.R.3221, next Tuesday, that won't stimulate housing much.  They did that by killling Senator Durbin's (D-IL) amendment to give bankruptcy judges the power to rewrite first mortgages.  That was a deal-breaker for the mortgage lending industry.  It was also the only thing that might have helped those facing foreclosure, albeit as the cost of raising future mortgage interest rates for the increased risk that future mortgages might be written down.

On Sunday, March 16, the Federal Reserve crossed a big line directly bailing out a non-depository financial institution and our fifth largest investment bank, Bear Stearns, for the first time since the Depression. The Fed forced Bear Stearns out of existence by loaning J.P.Morgan Chase $30 b. to purchase it at a fire sale price of $236 million on Sunday after Bear Stearns stock closed with a market valuation of $3.5 b. on Friday, March 14th.

The transaction raises a lot of questions. The ones I would like to deal with are: Why didn't the Fed just let Bear Stearns go bankrupt? How big a windfall was this for J.P.Morgan Chase? What risks does this Fed action pose for the future?

We don't know why the Fed took this action. Their press release announced the action in one sentence without any explanation.