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Monday, August 18, 2008

Bernanke Opened Pandora's Box

Looks like Bernanke opened Pandora’s Box

Bernanke Tries to Define What Institutions Fed Could Let Fail: “Ben S. Bernanke is still trying to define which financial institutions it's safe to let fail. The longer it takes him to decide, the tougher the decision becomes.

In the year since credit markets seized up, the 54-year- old Federal Reserve chairman has repeatedly expanded the central bank's protective role, turning its balance sheet into a parking lot for Wall Street's hard-to-finance bonds and offering loans through its discount window to investment banks and mortgage firms Fannie Mae and Freddie Mac.

The lack of clearly defined limits may put the Fed's independence at risk as Congress discovers that its $900 billion portfolio can be used for emergency bailouts that might otherwise require politically sensitive appropriations and taxes.”

Bernanke crossed a line that even serial bubble blowing Greenspan refused to cross.

“Under Bernanke's predecessor Alan Greenspan, the Fed drew a clear line against using its portfolio to influence specific markets. An internal study published in 2002 warned that “the favoring of specific entities” might “invite pressure from special-interest groups.””

So what happened IMMEDIATELY after Bernanke crossed that line?

“Just three days after the Fed approved a loan against Bear Stearns securities, Pennsylvania Democratic Representative Paul Kanjorski and 31 other lawmakers sent Bernanke a letter asking him to open the discount window to nonbank education-loan companies. Bernanke refused.

The 2002 study said such pressures “could pull the Fed into fiscal debates” and “compromise its objectives” for monetary policy: keeping employment high and inflation low.””

There you have it. Down the slippery slope we go… it won't be long now before irresponsible politicians will be happily commiting the Fed's $900 billion balance sheet to prop up their faviourite failed pet projects.

3 comments:

Boat52 said...

And more creative things will follow as Bernanke moves to firmly establish his position in history books.

Never before have so few created such a large mess for so many.

Perplexo said...

The Bear Stearns thing was IMO unconstitutional....the fallout will become apparent with time.
Mr. Bernanke and his institution simply did not have the Power in Law to do want they did...but that has not stopped this Executive before.

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