by William Neikirk
Rushing to prevent a stock-market meltdown, the Federal Reserve has suddenly turned itself into Wall Street’s financial safety net.
It is a new and controversial role for the nation’s central bank — and it could be an expensive one if it doesn’t succeed in easing a credit crunch and a crisis of confidence in the markets.
“We are in uncharted waters,” said Joel Naroff, a Holland, Pa. economic consultant. “The financial system looks nothing like it did 10 to 20 or 30 years ago with new financial products and the internationalization of capital flows. The Fed is facing issues that are new.”
Chairman Ben Bernanke announced Sunday night that Wall Street’s largest investment banks could borrow directly from the Fed just as commercial banks now do—and use questionable collateral, such as mortgage-backed securities, to boot.
Many critics say that the central bank is pledging to rescue Wall Street without demanding an end to excesses that contributed to today’s jittery markets, creating a “moral hazard” that could lead to more excesses.
See the rest of the story in today's Tribune:
“The Federal Reserve continues to give aid to the irresponsible,” said one of these, Peter Morici, business professor at the University of Maryland. Others said the U.S. government seemed much quicker to bail out Wall Street bankers than people who cannot afford their mortgages.
As it moved swiftly Sunday to bring about the sale of Bear Stearns & Co., Wall Street’s 5th largest investment house, to JP Morgan Chase, for only $2 a share, the Fed allowed the buyer to use Bear Stearns’ mortgage-backed securities as collateral for some $30 billion in financing.
The central bank also reduced the interest rate on these loans 3.25 percent and lengthened the payback term from 30 to 90 days. It is expected to cut its benchmark interest interest rate again on Tuesday—some say by as much as one percent.
When reporters asked Treasury Secretary Henry Paulson whether the Fed and the administration seemed more inclined to bail out big banks than Americans facing a home foreclosure, he responded: “Look at the Bear Stearns stockholder.”
But Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, said the administration should move to help homeowners facing foreclosure on their homes. He has proposed legislation that would provide government insurance to refinance troubled mortgages. “Until we help the people on Main Street, the problem on Wall Street will not be resolved,” he said.
Yet Dodd (D-Conn) defended the Fed’s actions as the right thing to do. And, if Wall Street firms are to able to borrow directly from the Fed, the senator said, they should also be subject to Fed’s regulations, just as commercial banks are, so that the “moral hazard” problem can be addressed.
This might not go down too well with Wall Street bankers, who come from a different culture than commercial bankers. They tend to take greater risks in an effort to make money, and have been leaders in creating new investment products that did not exist a few decades ago.
“The Federal Reserve continues to bail out major financial institutions without imposing meaningful conditions to improve their conduct and performance,” Morici said.
Bernanke and his Fed colleagues hoped that the Sunday decision to intervene in the Bear Stearns case would help turn the corner and ease market turmoil, where fear has persisted over whether another investment bank could be next.
John Silvia, chief economist for Wachovia Securities, said, “At this point, I think it (the Fed’s action) is enough.” But others said it is not clear that Wall Street firms are out of the woods.“People are still scared,” said David Wyss, chief economist at Standard & Poor’s, as the credit crunch continues and the economy slides into a possible recession.
The central bank has bailed out individual Wall Street firms in the past, but it went a big step forward in allowing them to borrow directly from the Fed’s so-called discount window, now used by commercial banks in trouble.
Silva and Dodd said the Fed could have gotten ahead of the curve by allowing Wall Street firms to borrow from the central bank much earlier. “The question comes up: Why didn’t you do this a couple of months ago?” Silva said.
Bernanke and colleagues have concluded that these Wall Street firms have become too big to fail, and so need backup assistance from the Fed when needed, said Naroff.
Barry Bosworth, economist at the Brookings Institution, raised another question: Suppose another Wall Street firm gets into trouble over mortgage-backed securities and no one wants to buy them? Fed intervention might not be enough to save such a firm, he said.
“This is a big break with the past,” Bosworth said. “Their job is to protect the over-all economy on the financial side, and they can’t make distinction (between commercial and Wall Street banks) anymore.”
Some fear that the Federal Reserve might be forced into bailing out troubled firms directly, by buying mortgage-backed securities or assets, rather than offering easy-term loans. But such a drastic step is seen only as a last resort.
Meanwhile, Wall Street is also hoping that the Fed will cut interest rates by as much as one percent when it meets Tuesday, a move also designed to bolster confidence.
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Comments
What a ridiculous concept. They're starting to run the economy like a half-witted liberal. That will get us nowhere quicker.
Posted by: Steve Hussein S | March 18, 2008 8:59 AM
"Chairman Ben Bernanke announced Sunday night that Wall Street’s largest investment banks could borrow directly from the Fed just as commercial banks now do—and use questionable collateral, such as mortgage-backed securities, to boot."
Now we know why the Depression era bank reforms had to be repealed in 1999 under the Republic Congress and signed by Clinton.
This is the end
of all elaborate plans
the end
Of everything that stands
then
No safety or surprise
the end
This is the end
(J Morrison)
Posted by: C.Morris | March 18, 2008 9:14 AM
Welfare for the Elite.
Health insurance for children.No way.
12.5 billion monthly for Nation Building.
We are wing nuts.
Posted by: Raving Loon | March 18, 2008 9:41 AM
E. J. Dionne Jr.--
Never do I want to hear again from my conservative friends about how brilliant capitalists are, how much they deserve their seven-figure salaries and how government should keep its hands off the private economy.
The Wall Street titans have turned into a bunch of welfare clients. They are desperate to be bailed out by government from their own incompetence, and from the deregulatory regime for which they lobbied so hard. They have lost "confidence" in each other, you see, because none of these oh-so-wise captains of the universe have any idea what kinds of devalued securities sit in one another's portfolios.
So they have stopped investing. The biggest, most respected investment firms threaten to come crashing down. You can't have that. It's just fine to make it harder for the average Joe to file for bankruptcy, as did that wretched bankruptcy bill passed by Congress in 2005 at the request of the credit card industry. But the big guys are "too big to fail," because they could bring us all down with them.
Enter the federal government, the institution to which the wealthy are not supposed to pay capital gains or inheritance taxes. Good God, you don't expect these people to trade in their BMWs for Saturns, do you?
The rest:
http://www.washingtonpost.com/wp-dyn/content/article/2008/03/17/AR2008031702154.html?hpid=opinionsbox1
Posted by: d hussein t | March 18, 2008 12:24 PM
Never do I want to hear again from my conservative friends about how brilliant capitalists are
Posted by: d hussein t | March 18, 2008 12:24 PM
You don't want to hear it anymore? Why not? Do you really think that most genuine capitalist endorse an idiotic move such as this? This was bone-headed and irresponsible.
Posted by: Steve Hussein S | March 18, 2008 12:58 PM
A story on race gets 250 responses. A story on the nation's economic realities gets 1 per hour.
And we blame the politicians for the taste of the "bull*&%^" that they feed us.
Posted by: Bud McFarlin | March 18, 2008 2:30 PM
Bud,
Most Americans are sitting on their couches getting fat watching 'reality' TV.
Posted by: C.Morris | March 18, 2008 5:50 PM
As my friend Jim Sinclair (jsmineset.com) says "This is it" Do not blame the Conservatives,this move is also supported by many Liberals in Congress. I say throw them all out.
Posted by: John Kiracofe | March 18, 2008 6:18 PM
Print the money, lower the intrest rates, bail the big banks out and screw the American worker by lowering the value of his hard earned savings. Where the H**l is the congressional oversight that is mandated by Article 1 of the Constitution of the United States, Chris Dodd?
Posted by: victor | March 18, 2008 6:21 PM
Socialism for the rich, capitalism for the poor. How quaintly republitard.
Posted by: rncbs | March 18, 2008 6:22 PM
You don't want to hear it anymore? Why not? Do you really think that most genuine capitalist endorse an idiotic move such as this? This was bone-headed and irresponsible.
Posted by: Steve Hussein S | March 18, 2008 12:58 PM
Oh, geez, I dunno, Steve. Wall St. is applauding this, aren't they they purest icon of American Capitalism.
Banks are applauding the Subprime loan bailout, aren't they titans of capitalism.
And why are the dems going along? Because they recognize that a complete meltdown of the financials markets dooms us all, even responsible investors and savers like myself.
The Fed is desperate and they have only themselves to blame. After the Savings and Loan fiasco, after the Enron disaster, they still didn't do enough to regulate the banking industry. Now we all suffer.
Posted by: dt | March 18, 2008 7:55 PM
The financial problems will continue to occur, unless the problems are naturally worked out. No fed plan will eliminate the future financial pain. This latest fed move will only delay the pain.
Sadly, that is what you and your children have to look forward to with the fed in power.
Posted by: larry | March 18, 2008 8:32 PM
Don't Worry, Be Happy and Party like its 1929.
It is very sad to see the country that gave the world the Constitution of the United States, one of the finest documents ever written to protect the people from their government completely bypassed by politicians and the people say and do nothing.
What has happened to my American cousins?
Posted by: Canuck | March 18, 2008 9:16 PM
And Ron Paul, the only presidential candidate with a clear understanding of how to fix the system by a return to the gold standard, receives a mere 5% of the vote. Go figure!
Posted by: Sondra | March 18, 2008 9:25 PM
BUd and CM,
That is most knucklehead people on this blog, and they happen to be libs, don't have the brains to understand economics. The typical post would be "Economy is bad, blame Bush".
I disagree with the move by the fed and their rate decision today - more money, higher risk of rising inflation and worsening dollar.
What I fing ironic is that the current economic situation has started from the sub-prime mess, which was caused by loosened lending stds which was done in part to appease the Jessee Jackson types saying that their was mortgage red-lining. Now the whole process is just going in reverse.
Posted by: Terry | March 18, 2008 9:50 PM
United Capitalists of America.
The country for corporations, not Americans.
Posted by: RomanB | March 18, 2008 11:16 PM
It will be a miracle if our country is not destroyed. These people should hang. They deregulated the banks, created money, and left all the citizen with the bill. Hang this people or put them to a firing squad. It's called swindling.
Posted by: Fred Starkey | March 19, 2008 1:32 AM
It will be a miracle if our country is not destroyed. These people should hang. They deregulated the banks, created money, and left all the citizen with the bill. Hang this people or put them to a firing squad. It's called swindling.
Posted by: Fred Starkey | March 19, 2008 1:32 AM
It is truly a shame when over 50% of the population in the USA cannot do a simple compound interests calculation but they can tell you who just won on DEAL OR NO DEAL!!!!
Posted by: DJ White | March 19, 2008 7:52 AM
I'm tired of hearing how these Wall Street welfare bailouts are necessary because "the system" will crash if they're not rescued.
Let the system crash. Let it burn. Let people suffer until we get an honest capitalist system with no B.S. Fed lifesavers. Oh yeah baby let it crash!
Posted by: John Stuart Mills | March 19, 2008 10:52 AM
That is most knucklehead people on this blog, and they happen to be libs, don't have the brains to understand economics.
What I fing ironic is that the current economic situation has started from the sub-prime mess, which was caused by loosened lending stds which was done in part to appease the Jessee Jackson types saying that their was mortgage red-lining. Now the whole process is just going in reverse.
Posted by: Terry | March 18, 2008 9:50 PM
-----------------------
No, Terry, I'm afraid it's YOU who doesn't get it when it comes to economics.
Yeah, it's all because of Jesse Jackson and Section 8 libs... ha ha! No my friend, these CDOs (I'll be happy to teach you what those are for a small fee) were written for a bunch of Wall Streeters to peddle on the public for big $$. And now that their black box models (again, tuition required for you) have failed to take account the oh-so-predictable reality that sub primers might not be able to meet their obs, these "capitalist hotshots" have to run to Daddy Fed squealing for their life preservers. And guess who's gonna pay for all this? But go on, keep on worshipping your heroes.
Posted by: Terry Has No Clue | March 19, 2008 10:59 AM
This one's for you, Terry:
FACT: Bear Stearns paid out BILLIONS of dollars in Bonuses in January. If they had filed for bankruptcy then those Bonuses would have to been paid back to Bear Stearns under Bankruptcy Law.
Yep, keep on using that taxpayer money so the bigshots can save their big bonuses before you call it all bankrupt.
But I guess that's Jesse Jackson's fault too, huh?
Keep on worshipping Bush blind boy.
Posted by: Maynard Keynes | March 19, 2008 11:10 AM
This one's for you, Terry:
FACT: Bear Stearns paid out BILLIONS of dollars in Bonuses in January. If they had filed for bankruptcy then those Bonuses would have to been paid back to Bear Stearns under Bankruptcy Law.
Yep, keep on using that taxpayer money so the bigshots can save their big bonuses.
But I guess that's Jesse Jackson's fault too, huh?
Keep on worshipping Bush blind boy.
Posted by: Maynard Keynes | March 19, 2008 11:10 AM
Hey Bud,
You and I are in pretty good company according to Terry.
Terry,
Just what did you disagree about? Your post is unclear.
I am glad to see that you finally seem to agree that the sub-prime mess is affecting a lot more people than just stupid borrowers and unethical lenders.
Posted by: C.Hussein.Morris | March 19, 2008 2:47 PM
Bud,
According to Terry, we are in very good company.
Thank you, Terry!
Posted by: C.Morris | March 19, 2008 9:00 PM
THNC and MK,
I think the Wall Street folks, the banks, and the homeowners should all pay the penalty - none of them should have a gov't bailout.
I mentioned Jesse Jackson becasue of the irony involved that he was believing that "his community" was not getting access to mortgages. They got their access and now look at the mess.
BTW, I've done by share Least-Cost Models, Time Series Analysis, and other econometric models - not sure what your qualifications are. I see your post is during the workday.
Bud and CM - my point is that most people that post in the Swamp have no clue how economics works, that is why there are few posts.
Posted by: Terry | March 19, 2008 10:16 PM
I am beginning to hear whispers in the press about ongoing FBI investigations into criminal misconduct re. this BS mess. This will be no real surprise, I know, but the ultimate mess will be many times larger than Enron.
The ultimate irony will be the US bailing out well heeled criminal enterprises, that grabbed their own bonuses first, with tax $$$.
Posted by: C.Morris | March 20, 2008 10:28 AM
Terry,
My point;
You slammed Bud and me, even though we seemed to be in the same quadrant on this thing. (?)
Posted by: C.Morris | March 20, 2008 7:29 PM
CM,
That wasn't my intenetion. My point is most (NOT ALL) people in here know nothing about economics. There are even a few libs in here that can explain supply and demand.
Posted by: Terry | March 21, 2008 6:44 AM