In an unusual move, The Fed is lending to Bear Stearns.

My view of what is going on starts with The Risk Disclosure Problem. When times are good, a firm like Bear Stearns keeps its risks under its kimono, and nobody minds.

When times are bad, all of a sudden people want to know what’s under a lot of firms’ kimonos. The firms try to re-arrange what’s underneath, to make it look nicer, which means selling some of their riskiers assets, driving down prices. That in turn gets people interested in what’s under still more firms’ kimonos, and the process snowballs.

One of the results is that all sorts of risky assets become cheap, at least if you are a speculator with access to capital and a willingness to hold on for a while. Enter the Fed, our new hedge fund of last resort.

Maybe what the Fed is doing will let a few firms keep their kimonos on. Meanwhile, though, everyone else in the policy world is trying to keep people in homes that they should not have bought in the first place. I think as long as they keep that up, nobody is going to be able to trust what’s under other folks’ kimonos.

What we need is for houses to be tradable again, which means that they are occupied by people who can afford them. When houses are trading, then mortgages will be trading. When mortgages are trading, the rest of the financial market will settle down. But the harder the policy wonks work at bailing out the housing market, the longer it will take for that market to straighten out, and the more leaks are going to develop elsewhere in the financial system.

On another front, according to another WSJ blog post,

With the dollar hitting new lows almost daily, Morgan Stanley currency strategist Stephen Jen, in a report, predicts the world’s major countries will intervene to support it, though not just yet.

It seems to me that it’s asking too much of the Fed to ask it to be doing currency market speculation now, too. And if other countries bear the burden, won’t that be a bit awkward? Have them artificially depreciate their currencies? Isn’t that what we’ve been beating the Chinese up for doing?