Rather, it’s once again time to trot out the old debate on whether asset prices should be part of monetary policy. An argument can be made that if the Fed had taken into account house prices, rates wouldn’t have stayed so low for so long.

http://www.caijing.com.cn/newcn/English/Economist/2007-07-24/25264.shtml

some excertps:

“Economics has an efficient wage theory. Its name misrepresents its content. It says that a person should be paid above market if his position allows him to do a lot of damage. For example, if a pilot slackens, he could kill a lot of people. Hence, the market wants to overpay him to keep him focused. A similar person who drives a truck can do less damage and is less well paid. In financial industry, if a person makes one mistake, he could cause losses of hundreds of millions to his clients. Hence, his clients want to pay him above market just to encourage him not to make mistakes. This efficiency wage theory applies to CEO’s too. Most CEO’s I have come across are not very capable but are very well paid. They mostly ride the momentum and go with the flow. Because their bad decisions can destroy so much, the market wants to give them enormous incentives not to make mistakes. Still, so many of them destroy their companies anyway. Efficiency wage is really a bribe. But, bribes don’t always work…”

“The LBO market is almost non-existent in China. China doesn’t have a sophisticated bond market to fund such transactions. Most businesses in China don’t have cash flow stable enough to make the debt game viable. Hence, the core expertise of most PE houses is not applicable in China.

“What China needs is VC for traditional industries. Three forces that drive China’s economy are industrialization, urbanization, and globalization. On the supply side, it is about creating businesses that meet the daily needs of households and businesses. It is like the West one hundred years ago. Because traditional industries have been stable businesses in the west, they are targets for LBO’s. In China, they are new and growth businesses. There are merely 1,500 companies listed in Shanghai and Shenzhen and many of them should be de-listed due to bad quality. In contrast, the US market has about 10,000 companies listed. China has too few good companies…”

While I did not use the word “bail out,” the intervention by the ECB went beyond ordinary open market operations. They made funding available on an open-ended basis at a non-penalty rate.

The focus of worry was institutions who were suspected of using commercial paper to fund asset-backed commercial paper, some (much?) of which had subprime exposure.

Now IMHO, borrowing short-term to invest in risky assets is a dumb strategy. One can take the position that institutions that engage in misguided investment strategies ought to have their heads handed to them. But in this case, the collateral damage was to the payment system, a crucial facility that could not be permitted to fail.

Hence, while I did not use the term “bail-out” one can make an argument that that is indeed what happened. The fact that the operations have ceased is not the point. The ECB, the Fed, and the BOJ (among others) have made it clear they will intervene again if needed.