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Tuesday, March 18, 2008

"The Fed Can't Do It Alone"

Alan Blinder says the Fed needs help:

The Fed Can't Do It Alone, by Alan S. Blinder, Commentary, Washington Post: ...What started last summer as a serious problem in a little-known -- but not so little -- corner of the U.S. mortgage market has blossomed into a worldwide financial panic, the sort we read about in history books. ...

The financial markets live or die on confidence. ... Such confidence looks to be draining from the system. Who can restore it? ... Today, it must be the world's leading central banks and treasuries, starting with our own. ...

Chairman Ben Bernanke and the Fed have been working overtime... On Sunday, the Fed even put its own balance sheet at risk to smooth the way for J.P. Morgan ... to "buy" Bear Stearns. But the stunningly low purchase price ... did not exactly inspire confidence.

Earth to the White House and Congress: The Fed cannot do this job alone.

But isn't the central bank the fabled "lender of last resort"? Yes, and the Fed is performing that role extensively. But central banks are designed to lend money to banks that are illiquid but not insolvent. It is not supposed to spend taxpayer money or even put much of it at risk. Those political decisions are properly made by elected leaders.

So what can be done now?

First, everyone should take a deep breath. To those living far from the canyons of Manhattan, the sky is not falling. ... Yes, the economy is limping, but it's not collapsing. And the effects of the Fed's interest rate cuts and the stimulus package that Congress enacted last month are still to come.

Second, it would be nice to see some patient capital step up to the plate. With so many assets on fire sale, buying opportunities abound. ...

Third, our nation's great financial houses need to use the breathing space the Fed is providing to put themselves in order -- post haste. They need to come clean, book the losses and, in many cases, raise new capital. ... (By the way, why are some of these companies still paying large dividends and enormous bonuses to their top executives?)

Fourth, we need leadership from political Washington. Forget the president. We need the Treasury secretary to take charge, not just to "support the Fed." While Paulson repeats his "strong dollar" mantra, confidence in the dollar ebbs. How about doing something about it -- such as a dramatic currency market intervention in concert with other nations?

Fifth, I'd like to hear the Fed, which has the credibility the administration lacks, talk more -- and in plain English. ...

But our best hope for leadership from Washington may now be in Congress. Rep. Barney Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.) are working on a fine bill that, by easing some of the stresses in the mortgage market, could do some real good. ...

I'm not so sure about the currency intervention, and not "everyone should take a deep breath," Congress needs to get the mortgage relief bill ready as soon as possible and the administration needs to support the effort, but I certainly agree with Blinder's main message. The Fed may not be able to get the job done by itself, so policymakers in other areas of government need to continue to look for ways to help with primary focus, for the moment, on mortgage relief.

    Posted by on Tuesday, March 18, 2008 at 12:27 AM in Economics, Financial System, Fiscal Policy, Housing, Monetary Policy | Permalink  TrackBack (0)  Comments (12)

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