The Federal Reserve’s announcement of an open-ended bail-out for Wall Street’s endangered financial firms and banks opens an ominous new chapter in what might be called “market socialism with American characteristics.” If Washington tries to do something for “losers” who are ordinary citizens, financial titans complain about violating free-market principles. When the titans themselves are going down, they rush to their patrons at the central bank and demand extraordinary relief. Government must save the big money, we are told, for the overall good of the economy. Thus, the financial system’s reckless losses–approaching $1 trillion but probably far more–are being “socialized,” dumped on the public, the very people victimized by its snares and falsified valuations.
Put aside the obvious hypocrisy and greed. This nation is on the brink of a historic catastrophe. It requires emergency responses from the federal government on a scale not seen since the Great Depression and the New Deal, the subject of this special issue. Yet the rescue party is composed of the same people who co-wrote this disaster. They are, first, the financiers who indulged their own appetites for extreme wealth and enlarged a financial system of esoteric fakery that inflated prices and profits. Second, the close collaborators were the Federal Reserve and other authorities who blessed this dangerous concoction and declined to enforce prudential standards.
Now the hoax is falling apart. Many millions of innocents, here and around the world, will suffer painful consequences. The authorities, meanwhile, are trying to “save the system” by propping up failure. We do not suggest that the government should not intervene. On the contrary, it must intervene far more forcefully–using the unique emergency powers of the Federal Reserve and Congress to cauterize the wound and take over private firms if necessary. To impose stern new rules of conduct on financial firms as the price of rescue. To ensure a reliable flow of capital and credit to the real economy–industry, commerce and consumers–which has been bullied for many years by Wall Street’s distorted values.
In a nutshell, here’s what the Fed did after tortured negotiations with Wall Street players: it first bailed out Bear Stearns with a loan that failed to reverse the collapse of the firm’s stock price and assets. Then it gave JPMorgan Chase a loan guarantee of $30 billion to protect it against losses as it took over Bear Stearns. Most significant, the Fed promised open-ended loans on easy terms to some twenty other major investment houses to protect them against the same threat. Nobody can put a price tag on all of the central bank’s rescue promises–many hundreds of billions if the deterioration continues–but the main point is, the Fed has agreed to take the rotten financial paper, such as home mortgage securities, off the hands of these troubled firms.
What did the Fed demand in return? Not much, it seems, but nobody knows. These private deals were made among gentlemen of high finance; no need to bother the public with complicated details. If that sounds harsh, check out the websites of the Federal Reserve Board and the New York Federal Reserve Bank. Their brief, utterly opaque announcements were addressed to bankers, without a word of explanation for citizens. In this crisis, the Federal Reserve is an untrustworthy agent for the public interest. Its institutional bias is to defend the club members and cover up its own errors.