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WASHINGTON — The Federal Reserve has taken its boldest action since the Great Depression, invoking rarely used powers in an effort to contain a panic threatening to undermine the economy. The central bank acted with speed the White House and Congress only could envy.
The Fed is largely free from many constraints that bog down other policymakers. Also, it is the only U.S. institution with the authority and ability to create money out of thin air.
For now, the steps orchestrated by Chairman Ben Bernanke, in the first critical test of his leadership since succeeding Alan Greenspan in early 2006, are earning praise from the Bush administration, Congress and presidential contenders Barack Obama, Hillary Rodham Clinton and John McCain.
But the Fed's moves are raising questions about whether its regulatory powers, established in the early 20th century, need overhauling and whether it took on some responsibilities that Congress and the administration should have shouldered.
In a remarkable week, the Fed:
_engineered the fire sale of bankruptcy-headed Bear Stearns Cos. to J.P. Morgan Chase & Co. with a $30 billion loan.
_offered emergency loans to other securities dealers under terms normally reserved for regulated banks.
_slashed a key short-term interest rate by three quarters of a percentage point, to 2.25 percent. The cut was sixth since September.
These steps followed moves to lend $100 billion in cash to banks and $200 billion in Treasury bonds to cash-strapped investment banks. The goal was to keep the financial system from seizing up.
"I spent 35 years on Wall Street, have been a Fed watcher for a long time and I have never seen the potential for a more severe credit crisis than this one," said David Jones, chief economist at DMJ Advisors and a former Wall Street economist. "It looks like we turned the corner precisely because of what the Fed did."
Was this the first look at a more activist Fed or just a targeted response to a looming economic meltdown?
Either way, the financial sector and its regulators are expected to come under congressional scrutiny in the days ahead.
Lawmakers from both parties are coming up with suggestions for restructuring the regulation of financial markets. The Treasury Department is working on its own blueprint for change.
Rep. Barney Frank, chairman of the House Financial Services Committee, is proposing new regulations on investment banks similar to those that apply to regular banks. That includes mandatory requirements for cash reserves to cushion losses.
Frank, D-Mass., said the Fed or other government entity should be designated as a "financial services regulator" with the power to limit risky practices.
White House spokeswoman Dana Perino said the administration would study the concept and other ideas "as we consider if there's additional things that we need to do."
Bear Stearns' unraveling and the credit woes facing other financial companies brought new attention to the Fed, which is part of the government and part of the commercial banking system.
Congress created the Fed in 1913 to prevent financial panics such as runs on banks and set it up as an independent entity. Its powers grew in 1933 and 1935. Although the Fed is subject to congressional oversight, its decisions do not have to be ratified by the president or Congress. Fed officials are not paid with money appropriated by Congress.
It has a seven-member board of governors, led now by Bernanke, and headquarters in Washington. Fed members are nominated by the president and confirmed by the Senate. There are two vacancies currently.
The system includes 12 Reserve Banks in major cities. These banks have their own boards of directors, two-thirds of whom are elected by commercial banks in the region and one-third by the Fed board in Washington.
With this combined government-financial industry heritage, the Fed serves as the nation's central bank. It manages the money supply, sets or influences certain key short-term interest rates, engages in open market buys and sales of government securities, and oversees and provides financial services to banks.
Because of the Fed's direct influence over interest rates, the money supply, and the larger economy, some have called the Fed chairman the second most powerful job in Washington after the president.
Economist Lawrence Chimerine, president of Radnor Consulting in Philadelphia, faults the Fed, particularly under Greenspan, for not paying more attention to what was happening in mortgage markets and to the rise in subprime lending. He said Bernanke's Fed complicated the situation by "raising rates too much and being too slow to start reducing them."
Still, Chimerine said, "I don't think there's any question Bernanke did the right thing" with the recent moves. "If Bear Stearns had gone bankrupt and if this credit crunch continued to spread, we would have had a real mess."
Alice Rivlin, a former Fed vice chairman, said she does not think Bernanke exceeded his authority, even though he acted under creaky legal provisions not used since the 1930s. "The Fed has been very aggressive and imaginative, and has taken very strong actions to get the credit markets functioning again," she said. "And that's good."
Anthony Ryan, assistant treasury secretary for financial markets, said the current framework for regulating financial institutions "is a reflection of literally decades of evolution. And we have a very fragmented regulatory structure."
Before addressing any changes, "we need to continue to make sure we work through the current challenges in the markets. This has to be job one," he said in an interview with C-SPAN to air Sunday. "And the actions by the Federal Reserve to help facilitate orderliness and stability is very, very important."
___
On the Net:
Federal Reserve: http://www.federalreserve.gov/
House Financial Services Committee: http://financialservices.house.gov/
© 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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- Regions: United States , Washington DC
 | Greenspan to blame for economic woes? | msnbc.com | Fri Mar 21 | 17 |
 | Bad Economic News Persists | Associated Press | Wed Mar 19 | 0 |
| Wall Street scrambles to avert a meltdown | Socialist Worker | Mon Mar 24 | 1 |
| Frank Calls for More Gov't Bank Powers | Associated Press | Thu Mar 20 | 1 |
| The crunch bites deeper in the US | BBC News | Thu Mar 20 | 0 |
- Public Discussion (21)
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{"commentId":1608140,"authorDomain":"nitewingsg1"}
Economist Lawrence Chimerine, president of Radnor Consulting in Philadelphia, faults the Fed, particularly under Greenspan, for not paying more attention to what was happening in mortgage markets and to the rise in subprime lending.
Kind of Like going to Los Vegas, hoping to make it rich, come back broke and asking your Dad to bale you out.
{"commentId":1608140,"threadId":"238543","contentId":"1383458","authorDomain":"nitewingsg1"}
- 8 votes
#1 - Sat Mar 22, 2008 11:05 AM EDT{"commentId":1609022,"authorDomain":"sirmonkey"}
No. Not a full analogy. The Fed was given responsibility to regulate banks regarding unfair and/or risky lending practices back in the 90's. The article here fails to mention that and gives only limited reference to congressionally granted authority of the Fed. It would behoove them to research the actual laws. I did.
Greenspan knew that the responsibility had been handed to him, but complained that he didn't see a practical way for the Fed to enforce these responsibilities. One can say that the he dropped the ball, or one can say that Congress should have recognized his point and either granted him more specific powers of regulation (so that he could do something about it), or taken it upon themselves to handle the details of such regulation. Neither did anything. Both failed.
Conveniently, as is so often the case with governments & bureaucracies, this well orchestrated failure is used as a call for even greater intervention and power for the government and bureaucracy. This is the natural tendency. Thankfully it was recognized long ago and our constitution guards against such natural inclinations of government.
{"commentId":1609022,"threadId":"238543","contentId":"1383458","authorDomain":"sirmonkey"}
- 2 votes
{"commentId":1633881,"authorDomain":"sirmonkey"}
Conveniently, as is so often the case with governments & bureaucracies, this well orchestrated failure is used as a call for even greater intervention and power for the government and bureaucracy. This is the natural tendency.
I do get tired of being so right about stuff, but it's very predictable some times. ;)
Bush seeks financial regulation overhaul
The plan would give major new powers to the Federal Reserve, according to a 22-page executive summary obtained by The Associated Press.
This can be seen as rectifying the former trouble, that the Fed did have the obligation to regulate these things but as Greenspan pointed out, did not have the means. In the future they may have the means to match the obligation added back in the 90's.
{"commentId":1633881,"threadId":"238543","contentId":"1383458","authorDomain":"sirmonkey"}
{"commentId":1668010,"authorDomain":"michaelsblomquist"}
The bail out is not your dad; the bail out is We the People. When are We going to wake up and demand justice? Socialized losses and privatized gains are not the way to run a free market.
This is NOT a subprime issue...This is systemic. The Alt-A, option ARMs are much more dangerous than the "subprime" loans. When option ARMs - pick a pays begin to recast in 2009-2010 foreclosures will skyrocket if they have not by then.
All of our economic activity has been built upon credit and the credit was built upon fraud. Our standard of living will crater so billions of Indiasians can receive marginally better standards of living. There is only so much pie to go around and the execs have stolen a large share of our pie and passed on the scraps to Asia.
If we are ever able to address this crisis we have to acknowledge the magnitude and root of the problem, which is fraud. Unsustainably low rates did play a role, but an overwhelming majority of the foreclosures have been occurring before a loan rate reset.
All of these discussions that the FED has helped out and now we have turned the corner is a JOKE - completely assinine. Once again the plunge protection team has temporarily saved the day; this is just a warning shot for the big boys to get their money out of the market. We will see all indicies back at 2002-2003 levels with NO other assets to inflate.
The housing bubble pulled us out of the tech wreck, but NOW America and Americans are drowning in debt. As our GDP plummets and defaults continue to rise we will no longer be able to find foreign investments for housing or treasuries. Inflation and interest rates will skyrocket and then....
Do you really think that our 230 year old country is immune to failure?
It is very important that we remain the world's super power, but we will not be able to do so unless we wake up!
{"commentId":1668010,"threadId":"238543","contentId":"1383458","authorDomain":"michaelsblomquist"}
{"commentId":1608149,"authorDomain":"marygj"}
And the poor folks get a $600 (or $300) "stimulus payment." Your government at work for the little people of America...Republican style...let it "trickle down" -- problem is we're still waiting for the "trickle down" from the Reagan, Bush and Bush years..."Voo doo economics" at it's best. Thanks Republicans for NOTHING...
{"commentId":1608149,"threadId":"238543","contentId":"1383458","authorDomain":"marygj"}
- 13 votes
#2 - Sat Mar 22, 2008 11:08 AM EDT{"commentId":1608419,"authorDomain":"JoulesBeef"}
and you know how the price of gas is ridiculous?
the dollar is crap and the iraqi war adds a huge premium do to the unrest in the oil regions.
SO don't fall for the "we wont raise you taxes mantra".
Your paying a huge tax increase so that bush can fight his war.
and it has trickled down into the super market where food is sky rocketing as well.
{"commentId":1608419,"threadId":"238543","contentId":"1383458","authorDomain":"JoulesBeef"}
- 7 votes
{"commentId":1608915,"authorDomain":"marygj"}
Joules the Republicans have already started the mantra to the rich folks you know the ones who get all the tax breaks they don't need. They say if the Republican tax cuts for the rich are not made permanent it will be a tax increase. I am still trying to understand how returning taxes back to their pre tax cut level is a tax increase. I hate the Republican logic and the fact that they think we are STUPID.
To think that in 2000 self serve regular gas was $1.54 a gallon and people were getting anxious and to look at where it is now is unbelievable. I knew last year when gas hit the $3 gallon threshold that it was a test to see how much the gas guzzling companies could squeeze out of the economy before people began to scream. Thanks again Republicans. I say Republicans because they are the party of George Bush and they are the ones who rubber stamped everything Bush and Cheney did to this country. Where's Barbara Bush? Is she "really proud" of son one of the worst if not the worst president in our history?
{"commentId":1608915,"threadId":"238543","contentId":"1383458","authorDomain":"marygj"}
- 1 vote
{"commentId":1608996,"authorDomain":"PamelaDrew"}
I say Republicans because they are the party of George Bush and they are the ones who rubber stamped everything Bush and Cheney did to this country.
The problem with that thinking is that many, many democrats including Clinton as President laid the ground work. My focus is Monsanto and the "biotech policy" created by Bush I and Quayle that had as much backing from Clintoin and corrupt Democrats as the GOP. Billions of lost exports and thousands of family farms lost by the same policy on both sides of the aisle. The line isn't between parties by the folks who have a voice inside the beltway and the ones who get the promises and the tab for yet another midia coup in selling their reps as public servants and covering fluff rather than crimes.
{"commentId":1608996,"threadId":"238543","contentId":"1383458","authorDomain":"PamelaDrew"}
- 1 vote
{"commentId":1609033,"authorDomain":"marygj"}
Acknowledged Pamela. I am focused on the past 8 years for my comment. Also are soy beans (which we use in all these processed foods) engineered as well?
{"commentId":1609033,"threadId":"238543","contentId":"1383458","authorDomain":"marygj"}
{"commentId":1609139,"authorDomain":"Rixar13"}
And if Bush had been Successful, Poor, Disabled, and Retired older people would have their Social Security tied to the stock market. Hence would have lost their means of Survival. Near future of inferred unemployment will be our second Great Depression.
{"commentId":1609139,"threadId":"238543","contentId":"1383458","authorDomain":"Rixar13"}
- 3 votes
{"commentId":1609524,"authorDomain":"PamelaDrew"}
That's an excellent point to remember, there could have been a much bigger bust for the public.
{"commentId":1609524,"threadId":"238543","contentId":"1383458","authorDomain":"PamelaDrew"}
- 1 vote
{"commentId":1608513,"authorDomain":"JoulesBeef"}
you also have to wonder how the fed, can basically giv one company to another without input from the stick holders, competative bidding.. they just took sterns and gave it to morgan. and what about eh 30 billion that we took responcibility for? whoes descision was that?
{"commentId":1608513,"threadId":"238543","contentId":"1383458","authorDomain":"JoulesBeef"}
- 2 votes
#3 - Sat Mar 22, 2008 1:28 PM EDT{"commentId":1608583,"authorDomain":"kevindicks"}
All hail our puppet masters! The Fed is entirely in control of the economy. They knew what they were doing when they sent us into recession, and the recession will end when they say it ends.
{"commentId":1608583,"threadId":"238543","contentId":"1383458","authorDomain":"kevindicks"}
- 5 votes
#4 - Sat Mar 22, 2008 1:54 PM EDT{"commentId":1608629,"authorDomain":"iqballatif"}
Fed did the right thing- if they would have not acted with such clarity all prime paper would become toxic, not as a result of failing economy but as a result of troika of manipulation where hedge funds are betting on commodities, shorting the financials sector and helping unwind the Yen carry trade, the three together are lethal trade manipulations and have nothing to do wit the actual demand or supply of commodities, Fed has just shut the door on them.
The ecstasy never ends, the fatalities mount and profits search is like unending pursuit of Eldorado, seeing perfectly normal ex-bankers ganging up to bring BSC down one day and going after Lehman the other is just pure fun. These are new vandals at the door, beware! Have you seen the movie 'The Independence Day' aliens in search of resources, these hedge funds are in search of big profits and their ability to trade both ways have provided new stability to the global markets. Refined to death 'Shoot first ask questions later' is the new-fangled philosophy of the new age.
The instruments of short are far more lethal than instruments that help you go long. The capacity of ultra shorts, like SDS, DXD in drawing the last ounce of blood left in the bulls, is immense. A bull is a bear at the same time; those who in this august thread feel that a bull is never a bear fail to comprehend that GS made its monies from short on ABS.
A week last Tuesday the sophistication of bull-bear relationship can be well imagined that a hedge fund which bought a huge qty of 40 puts on BSC was borrowing from BSC to short them. Imagine borrowing a stiletto from your lover to plunge it in her heart.
GS and LEH earnings yesterday should have been much worse after 9 months of continuous bleeding of the financial sector. The ability of the market to punish excesses and exuberance mercilessly, and overnight, is the strength of this market. BSC's 9.4% shareholder turned from a billionaire to a pauper overnight – is this not what we all want to punish, those who make mistakes? And are we not addressing the fine print of moral hazard more than adequately? Now when these funds want to kill everything in sight, then comes the bank of last resort and takes those 'papers', which back the other nearly 99% of the American population's houses and they do not have exposure to 'ninja loans' or subprime problems.
{"commentId":1608629,"threadId":"238543","contentId":"1383458","authorDomain":"iqballatif"}
- 3 votes
#5 - Sat Mar 22, 2008 2:04 PM EDT{"commentId":1608782,"authorDomain":"wood-s"}
So that's the famous carpet -- the biggest decision Bush made in his presidency, how to design a carpet for the oval office that said "Optimistic Person Comes to Work Here!" And how clever of him to pose on it when trying to reassure us that the economy will be just hunky dory 'cause he's giving us all a $600 rebate check to spend on new houses and the like.
I hope President Obama has that carpet burned.
{"commentId":1608782,"threadId":"238543","contentId":"1383458","authorDomain":"wood-s"}
- 1 vote
#6 - Sat Mar 22, 2008 2:54 PM EDT{"commentId":1608946,"authorDomain":"marygj"}
Also, the rebate check will not be counted as taxable income. However, if you owe back taxes, the IRS will divert your payment to that bill before sending anything to you.
Just so you know the IRS giveth and the IRS taketh away...
{"commentId":1608946,"threadId":"238543","contentId":"1383458","authorDomain":"marygj"}
- 1 vote
{"commentId":1608818,"authorDomain":"mike8902"}
@!$%# the Fed here is some good legislation the congress should push through: Abolish the Fed act
{"commentId":1608818,"threadId":"238543","contentId":"1383458","authorDomain":"mike8902"}
- 1 vote
#7 - Sat Mar 22, 2008 3:08 PM EDT{"commentId":1608878,"authorDomain":"CurtisLow"}
+1
Since the FED loans the money to the government at interest and they have a monopoly on creating our money, where does the government get the money to pay the interest? Answer....by borrowing more money from the FED which sinks us deeper and deeper in debt as a nation, we can never get out of and that's why our dollar is worth nothing. Since 1913 they have had to print more and more money just to cover the interest on money borrowed.
The FED system does not need to exist AND the government can manage and print money interest free....the treasury is responsible for our money not a private bank.
{"commentId":1608878,"threadId":"238543","contentId":"1383458","authorDomain":"CurtisLow"}
- 1 vote
{"commentId":1608890,"authorDomain":"PamelaDrew"}
The Fed is largely free from many constraints that bog down other policymakers.
Good old AP skipping over the fact that the FED is a private cartel, stolen from the taxpayers. It happened over the protests of folks like Charles Lindbergh Sr.
"This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President (Woodrow Wilson) signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill."
Oddly enough victim of another tragedy and unsolved mystery that stands out in the history of America. Like so many who challenge the power of the Rockefeller interests. During the 2004 election, its hard to remember, but the NBC broadcasts were calling Rockefeller Plaza, Democracy Plaza.
It stuck with me because I had read Ida Tarbell shortly after the Bush 2000 fiasco, because it went onto the CIA's burn list. An old friend shared that and the very idea of being prohibited was an immediate draw. It really piqued my interest to know that the Texas oil boys of this day and age would care about something written in 1915!!
Read The History of Standard Oil and you'll see just how much. It's the seeds of the crime ring, the simplest form of the rise of the oil empire ruling the policy and controlling the currency.
{"commentId":1608890,"threadId":"238543","contentId":"1383458","authorDomain":"PamelaDrew"}
- 4 votes
#8 - Sat Mar 22, 2008 3:37 PM EDT{"commentId":1609154,"authorDomain":"newbroom"}
heckava job....Ben
{"commentId":1609154,"threadId":"238543","contentId":"1383458","authorDomain":"newbroom"}
- 2 votes
#9 - Sat Mar 22, 2008 5:03 PM EDT{"commentId":1609171,"authorDomain":"NewDraper"}
it is the only U.S. institution with the authority and ability to create money out of thin air.
Wasn't this what the conferate states did in the civili war?
I liked the Vegas analogy upstairs from here, but I think we are more like the heart attack victim who decides to eat fruit and exercise after a life of prok rinds and television.
Maybe, instead of making laws about corporate bail outs; our politicians should make some laws against neo-con rogues banking rupting the country and turning it over to corporate interests which they happen to own.
You know. An ounce of prevention...
{"commentId":1609171,"threadId":"238543","contentId":"1383458","authorDomain":"NewDraper"}
- 1 vote
#10 - Sat Mar 22, 2008 5:10 PM EDT{"canLink":false,"threadId":"238543","isPrivate":false}
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