Even on Wall Street, capitalism takes a hit
BARRIE MCKENNA
March 27, 2008 at 9:09 PM EDT
WASHINGTON — The cover of the latest issue of BusinessWeek shows Ben Bernanke in profile against a bright red and orange backdrop, pensively stroking his grey beard and looking remarkably like Vladimir Ilyich Lenin.
The imagery is intentional and pointed. From BusinessWeek to The Wall Street Journal and beyond, the U.S. business elite has awoken to the realization that the U.S. Federal Reserve Board, backed by the Bush administration, has embarked on a revolutionary course to save financial capitalism from implosion.
It isn't just about the Bear Stearns rescue, which Mr. Bernanke greased with a $30-billion (U.S.) loan. Mr. Bernanke's Fed has opened wide the central bank's vault, pledging nearly half its $900-billion balance sheet to the cause, while strong-arming other federally sponsored lenders to similarly flood mortgage markets with liquidity.
In just a few short weeks, U.S. authorities have given up on the long-held notion that financial markets can self-correct. Government intervention is back in vogue like it hasn't been since the dark days of the 1930s.
“Comrade Ben is determined that there will be no financial meltdown and no depression while he is in command,” economist Ed Yardeni wrote to clients. “Given the initial reaction [on Wall Street], I suppose this means we are all financial socialists now.”
The revolution may be just beginning. From Congress to the U.S. presidential campaign trail, lawmakers are promising a vastly expanded government presence in financial market regulation.
During a major economic speech yesterday in New York, Democratic front-runner Barack Obama called for a sweeping modernization of financial market regulation to address the problems exposed by the housing meltdown.
“To renew our economy and to ensure that we are not doomed to repeat a cycle of bubble and bust … we need to address not only the immediate crisis in the housing market, we also need to create a 21st-century regulatory framework.”
Mr. Obama then outlined several key reform principles, including direct Fed oversight of all institutions taking its loans, minimum liquidity and capital requirements for investment banks, enhanced rules for “complex financial instruments,” confronting conflicts of interest at bond rating agencies, enhancing risk management at banks, and regulating financial institutions for “what they do, not what they are.”
Earlier this week, Treasury Secretary Henry Paulson, a former Goldman Sachs chief executive, said that if big Wall Street investment banks can run to the Fed for emergency lending, they must also expect tighter regulation. “The world has changed,” he acknowledged.
The Democrats, which polls show are poised to consolidate their hold on Congress in the November election, are already asking pointed questions about the Fed-brokered Bear Stearns fire sale. The Senate banking and finance committees have each demanded more details from Mr. Bernanke and James Dimon, chairman of JPMorgan Chase, which is acquiring Bear Stearns.
Mr. Bernanke is now caught between critics on the political right, who argue he's gone too far in bailing out Wall Street, and those on the left, who say government should be doing much more to help the millions of individuals hurt by the housing crisis.
Peter Wallison, a former U.S. Treasury official who advises the U.S. Securities and Exchange Commission on improved financial reporting, said the hasty Fed bailout of Wall Street is an open invitation to more regulation.
“The Fed's actions have summoned the would-be regulators from the vasty deep, and if they succeed in turning securities firms into wards of the government, as the banks have become, we will have much less innovative, profitable, aggressive, competitive and successful financial system,” Mr. Wallison warned in the latest issue of The American, published by the conservative American Enterprise Institute.
Just how much U.S. taxpayers wind up on the hook for all this is unclear. The Fed could wind up returning profits to the U.S. Treasury, or it could take a major hit.
Investment banks are eagerly embracing the Fed's largesse, according to figures released yesterday. Broker-dealers borrowed $37-billion from the Fed's 2.5-per-cent discount window on Wednesday, $8.2-billion more than the previous week.
Guaranteeing Bear Stearns' portfolio of troubled investments sets a bad precedent by transferring potential losses from the market to taxpayers, complained Allan Meltzer, a professor of political economy at Pittsburgh's Carnegie Mellon University.
“I do not believe the current system can remain if the bankers make the profits and the taxpayers share the losses.”
Others, however, said Mr. Bernanke may have saved the U.S. financial system from the cascading series of failures that marked the Great Depression of the 1930s.
“Bernanke may very well turn out to be a hero here, when everything is said and done and the recovery comes,” Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton business school in Philadelphia, told the school's online magazine |
