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The Fed Muddles Through a Bailout | |
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THE CONSERVATIVE REVIEW
April 22, 2008
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The Fed Muddles Through a Bailout
By George Will
Some say the world will end in fire,
Some say in ice. ...
-- Robert Frost
WASHINGTON -- And some say it will end because of subprime
mortgages. But for those who cultivate fears of catas-
trophes as excuses for expanding government supervision
of other people's lives, the bad news is that the world
is not going to end -- not from global warming or economic
cooling or anything else. Today's untethered Federal
Reserve will, however, make the muddle-through interest-
ing.
The late Sen. William Proxmire, a populist Democrat who
represented Wisconsin for 32 years, wanted all members
of Congress to write on their bathroom mirrors, so it
is the first thing they read each day, this: "The Fed
is a creature of Congress." Congress created the Federal
Reserve pursuant to its constitutional power "to coin
money" and "regulate the value thereof." Fortunately,
Congress has left the Fed free to go about its business.
But suddenly the Fed is undergoing radical "mission creep."
The description of the Fed as the "lender of last resort"
is accurate without being informative. Lender to whom?
For what purposes? Last resort before what? Did the bank
"lend" $29 billion to Bear Stearns, or did it, in effect,
buy some of the most problematic securities owned by Bear?
If so, was this faux "loan" actually to J.P. Morgan Chase?
The purpose of the money was to give Morgan an incentive
to buy Bear -- at a price so low that an incentive should
have been superfluous.
In 1979, when the government undertook to rescue Chrysler,
conservatives worried not that the bailout would fail but
that it would work, thereby inflaming government's inter-
ventionist proclivities and lowering public resistance to
future flights of Wall Street socialism. It "worked":
Chrysler has survived to endure its current crisis. The
fallacious argument in 1979 was that Chrysler was then
"too big to be allowed to fail."
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Today's argument is that Bear Stearns was so connected to
the financial system in opaque ways that no one could guess
the radiating consequences of its failure -- the financial
consequences or, which sometimes is much the same thing,
psychological.
But what is now the principle by which other distressed
firms will elicit Fed interventions in future uncertainties?
By what criteria does Washington henceforth determine
whether a large entity is "too connected to fail"?
The Fed has no mandate to be the dealmaker for Wall Street
socialism. The Fed's mission is to preserve the currency
as a store of value by preventing inflation. Its duty is
not to avoid a recession at all costs; the way to get a
big recession is to engage in frenzied improvisations
because a small recession, aka a correction, is deemed
intolerable. The Fed should not try to produce this or that
rate of economic growth or unemployment.
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After the tech bubble burst in 2000, the Fed opened the
money spigot to lower interest rates and keep the economy
humming. And since the bursting of the housing bubble,
which was partly caused by that opened spigot, the Fed has
again lowered interest rates, which for now are negative
-- lower than the inflation rate, which the open spigot
will aggravate.
A surge of inflation might mean the end of the world as
we have known it. Twenty-six percent of the $9.4 trillion
of U.S. debt is held by foreigners. Suppose they construe
Fed policy as serving an unspoken (and unspeakable) U.S.
interest in increasing inflation, which would amount to
the slow devaluation -- partial repudiation -- of the
nation's debts. If foreign holders of U.S. Treasury notes
start to sell them, interest rates will have to spike to
attract the foreign money that enables Americans to
consume more than they produce.
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Having maxed out many of their 1.4 billion credit cards,
between 2001 and 2006 Americans tapped $1.2 trillion of
their housing equity. Business Week reports that the middle-
class debt-to-income ratio is now 141 percent, double that
of 1983. Because anxiety is epidemic, bipartisanship has
reared its supposedly pretty head.
Republicans and Democrats promise cooperation, compromise
and general niceness using other people's money. If Con-
gress cannot suppress its itch to "do something" while
markets are correcting the prices of housing and money,
Congress could pass a law saying: No company benefiting
from a substantial federal subvention (which would now
include Morgan) may pay any executive more than the high-
est pay of a federal civil servant ($124,010). That would
dampen Wall Street's enthusiasm for measures that social-
ize losses while keeping profits private.
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End of CONSERVATIVE REVIEW
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