07.01.2008 0

Fed Bailout Puts U.S. Economy into Uncharted Waters

  • On: 07/16/2008 15:00:04
  • In: Economy
  • “A Fed official conceded privately this week that ‘we may have crossed a line’ in jumping into Bear Stearns — and that is an understatement. There is no doubt that the U.S. economy is in uncharted territory, with reverberations that cannot be forecast.” – Bob Novak, “The Fed on a Limb,” March 20th, 2008.


    In The Rime of the Ancient Mariner, Samuel Taylor Coleridge wrote of the mariner who shot his ship’s good luck, the Albatross, which brought ill fortune upon the ship’s crew, who all – save the mariner – die. And then, the mariner is left alone and lost at sea:

    “Alone, alone, all, all alone,
    “Alone on a wide wide sea !
    “And never a saint took pity on
    “My soul in agony.”

    And so it is with the Federal Reserve. Single-handedly, the Fed has shot down America’s own good fortune – the free market – in its interventions to artificially increase the money supply, lower interest rates, and now its unprecedented bailout to save Bear Sterns, an investment firm, from financial ruin. As Bob Novak noted in his Washington Post column yesterday, the Fed’s moves have led us into uncharted waters.

    And, there can be no pity for this crime. Hopefully, the Fed will see its error, as ultimately did the mariner before the crew perished:

    “And I had done an hellish thing,
    “And it would work ’em woe :
    “For all averred, I had killed the bird
    “That made the breeze to blow.
    “Ah wretch ! said they, the bird to slay,
    “That made the breeze to blow !”

    As Bob Novak noted, the Fed has helped out its favored institutions, leaving small town banks and businesses to rot – not unlike the ship’s crew:

    “The reaction in the hinterland was far less favorable. The Washington office of the Independent Community Bankers of America was flooded by members from across the country complaining of discriminatory favoritism toward their big-city brethren. If they had blundered into financial failure, the community banks said, they would not be bailed out but would be investigated and prosecuted. ‘Too big to fail,’ therefore, becomes ‘too big to be punished.’”

    There can be no doubt that the move was based on favoritism. As Novak points out, this bailout was initiated by the head of the New York Federal Reserve who has a cozy relationship with Wall Street:

    “The Federal Reserve’s unprecedented bailout of Bear Stearns was crafted not at the White House or the Treasury but in secret by a New York central banker whose name is unknown to Washington power brokers and who was a Clinton administration presidential appointee… The plan pressed by Timothy F. Geithner, president of the New York Federal Reserve Bank, effectively substitutes the central bank for the market in determining financial outcomes… [T]he initiator was the 46-year-old Geithner, who as head of the New York Fed maintains a traditionally intimate relationship with Wall Street…

    “Geithner’s plan to open the Fed’s discount window for the first time to non-banks stunned the financial community but received little attention from a Congress in recess, including presidential candidates…”

    This sort of cronyism must not be allowed to stand. It is high time that the Congress take a close look at the Fed’s seemingly limitless powers to intervene in the free market, and set about creating equal standards for all of the nation’s financial institutions, even and especially the small ones.

    ALG Perspective: Protecting our economic prospects by its nature requires protecting the laws of the free market. It’s not up to the government to determine winners and losers, and this move demonstrates the power of an unelected bureaucracy – the Fed – to make such major decisions in secret. The true nature of the Fed has been exposed – an insider’s club for the nation’s major financial institutions. Contrasted with the community banks that most certainly have to pay the price for market failure, it is clear that the major firms have an incentive to engage in risky behavior that endangers our overall economy. And like the mariner, the Fed may only learn its lesson the hard way.

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