Some insiders see harm in action
Ex-Fed officials and others are saying that intervention keeps the markets from correcting.
Bloomberg News
As the U.S. government takes ever-stronger measures to try to stabilize financial markets, some former Federal Reserve officials, lawmakers, and financial industry executives said yesterday that too much had already been done.
"Every time they intervene, they do more harm than good," said Peter Schiff, president of Euro Pacific Capital in Darien, Conn., a brokerage that manages $1 billion.
John Bogle, founder of the Vanguard Group, the Malvern mutual-fund company, said the government is "punch drunk" with proposals to rescue the financial system.
"We're playing a game of casino capitalism, interfering with the way the market is working," Bogle said. The government's approach "doesn't seem systematic," he said.
Critics said the government actions, such as those in the last two weeks that prevented the failures of Fannie Mae, Freddie Mac, and American International Group Inc., can't postpone the inevitable worsening of housing and financial markets. They said the bailouts by the Federal Reserve and the Treasury Department also encourage future reckless risk-taking by investors.
"If we don't stop now, there will be no end," said Gerald O'Driscoll, a former vice president of the Dallas Fed and now a scholar at the Cato Institute in Washington.
He and two other former Fed officials - Vince Reinhart, former director of the Fed's monetary affairs division, and Marvin Goodfriend, a former official at the Richmond Fed - questioned the market interventions.
Meanwhile, Republican lawmakers stepped up efforts to put a halt to further rescues. One group of 100 lawmakers released a letter asking Fed chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. to "refrain from conducting any additional government-financed bailouts for large financial firms."
"We may just be prolonging the housing slump," said Rep. Scott Garrett (R., N.J.). "We should let the markets work."
The ranking Republican on the Senate Banking Committee, Richard Shelby of Alabama, said he wants the Fed to let markets work rather than opt for bailouts, even if the consequences are "brutal."
"Where do we stop? Where do we draw the line?" Shelby said. "I don't know what road" Fed officials are "going down," he said. "If they don't watch what they are doing, they are going down a path of no return."
To be sure, only a minority of lawmakers, financial professionals, and former government officials have voiced opposition to further rescues. Prominent figures - including former Fed chief Alan Greenspan and his predecessor at the central bank, Paul A. Volcker, and presidential candidates Barack Obama and John McCain - have called the Treasury and Fed actions necessary.
Doug Elmendorf, a former economist at the Fed and Treasury, said he doesn't oppose government interventions, though he is "opposed to doing it wrong."
"I think it would be a major challenge for the government to design a fair and effective program to inject funds into financial institutions," said Elmendorf, now a senior fellow at the Brookings Institution. "Structuring either of those in a way that doesn't reward mistaken private investments is very difficult."
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