On March 16, the Fed issued a "non-recourse loan" to JPMorgan bank in order for it to purchase Bear Stearns, a struggling investment bank, ostensibly because a collapse at Bear Stearns would leave the nation facing a "market crash." News of the buyout, and the ensuing firestorm of controversy that ensued on CNBC and C-SPAN, prompted furrowed brows and baffled shrugs across the country as Americans struggled to come to grips with the fact that the Fed may not be the hallowed institution everyone assumed it was under the God-like omniscience of the Alan Greenspan era. Of course, no one griped about the government's lack of control, or even oversight, of our nation's money supply during those heady low-inflation, high-growth days of the '90s, but now that the cheap money hangover seems to be setting in, it may be time for us to look at exactly how the economy is being run and who, exactly, is running it.
No one really doubts that our financial sector is in capable hands. Between Federal Reserve Chairman Ben Bernanke (a professor of economics at Princeton for 20 years before joining the Fed) and Treasury Secretary Henry Paulson (former CEO of Goldman-Sachs), the United States has what could be a winning combination of academia and the private sector at the helm of its monetary policy. If anyone knows what is going on in the fantastic realm of domestic and international high finance, it's these guys.
But Americans are rightly worried about their own economic future. Aside from crippling foreclosure rates, the exploding price of oil and food and the dramatic free fall of the dollar's value, America's "politically independent" caretakers of monetary policy now look poised to enter the policy-making realm. On Monday, Paulson announced a proposal to "overhaul" the financial regulatory system that would give the Federal Reserve wide oversight over Wall Street and "day-to-day bank supervision." Under the plan, the Fed would be given the power to aggressively inspect "institutions of all stripes" and will be given wide-ranging access to the bookkeeping of investment banks. Additionally, the plan calls for three new "super-regulatory" agencies that would take over many of the tasks currently assigned to the Securities and Exchange Commission and other important government regulators.
Bringing some transparency into the opaque realm of hedge funds and derivative markets is a lofty and necessary goal, but the problem is that the Federal Reserve and the Treasury Department remain unelected institutions of current and former bankers who, many argue, aren't overly concerned with the problems of the Great Unwashed. For example, the "non-recourse" part of the Fed's loan to JPMorgan means that taxpayers have now assumed the risk of Bear Stearns' aggressive portfolio in subprime debt markets to the tune of about $30 billion. Shareholders immediately balked at the original buyout price of $2 a share (down from $172 a share in January 2007), forcing JPMorgan to raise the price to $10, making the Fed's "emergency" move into a massive bailout for some of America's richest investors and fellow banks (and, it should be noted, to a fair share of pension and retirement funds). This intervention into the banking industry runs contrary to an example set by Scandinavian Central Banks during their own banking crises in the early '90s. Then, the Central banks of Norway and Sweden nationalized struggling banks, insuring depositors they wouldn't lose their money yet refusing to pay investors in the banks a single cent. Our Nordic cousins were able to rescue their vulnerable fiscal institutions (and those banks' invaluable "liquidity") while maintaining the central maxim of capitalism - with the possibility of great reward comes great risk as well.
Allowing our largest banks to fail would be an unmitigated disaster. Yet allowing the millions of Americans (and their small businesses) who are facing bankruptcy and foreclosure to fall by the wayside would also be economically (and politically) devastating. To be sure, borrowers deserve much of the penalty for their unsound financial management, but while new mortgage assistance plans get bandied about by this year's crop of presidential candidates, Congress continues to do nothing but hand out Bush's favorite temporary tax rebates, mere drops in the bucket when seen against the massive peril posed by this and next year's crop of likely foreclosures. Before propping up investment banks, our government should probably look at ways to let millions of American families keep their homes and livelihoods.
The Treasury Department's new plan, while addressing a real need for modern financial regulation, does nothing to alleviate America's economic pain, while the unaccountable Federal Reserve, through its newly expanded role as a banking bail-out fund, allows the rich to stay that much richer. Here's hoping Congress - and the current and next president - get wise to the pinch most Americans are feeling and deliver a meaningful plan to help America's disturbing number of new economic casualties.
-AV
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