Publication: Conservative Review
Finance's "New Day" | |
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THE CONSERVATIVE REVIEW
March 21, 2008
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Finance's "New Day"
By Robert D. Novak
WASHINGTON, D.C. - The Federal Reserve's unprecedented
bailout of Bear Stearns was crafted not at the White House
or Treasury, but in secret by a New York central banker
whose name is unknown to Washington power brokers and was
a Clinton administration presidential appointee.
"It's a new day," commented an investor and longtime Fed
watcher. Around the world, that day's dawning is viewed
with apprehension because of election-year rhetoric from
America.
The plan pressed by Timothy F. Geithner, president of the
New York Federal Reserve Bank, can effectively substitute
the central bank for the market in determining financial
outcomes. Nobody takes seriously the assertions by Fed
spokesmen that the aid for Bear Stearns and its dictated
bargain-price sale to J.P. Morgan was "extraordinary." So,
in Washington and New York, the question is who will be
next. Speculation turned to who else will qualify as "too
big to fail."
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One candidate was Lehman Brothers, whose stock dropped
19.1 percent on the day after the bailout was announced.
Government-backed Fannie Mae and Freddie Mac lending
agencies also could be bailout candidates.
The central bank's bold new role relieves the pressure on
American financiers who have committed serious errors but
does not reassure investors around the world alarmed by
what they perceive in the U.S. political process, where
class warfare has gained traction. The populist prospect
of a new Democratic administration and Democratic Congress
that will impose higher taxes and trade protection
contributes to what is seen as an international buyers
strike by investors that feeds the financial crisis.
Startling though the Fed's intervention is, it fits a
pattern around the world by central banks -- including
the Bank of England. The British central bank first had
resisted a bailout last October for the Northern Rock
bank but was pressed into it by Treasury officials in
the Labor government. In contrast, the initiative to
save Bear Stearns came from the Federal Reserve.
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Quick action last week when Bear Stearns was going under
contrasted sharply with the normally lugubrious pace of
the U.S. federal government. Ben Bernanke, Alan Greenspan's
scholarly successor as Federal Reserve chairman, of course
approved the bailout (as did Treasury Secretary Henry
Paulson). But the initiator was the 46-year-old Geithner,
who as head of the New York Fed maintains a traditional
intimate relationship with Wall Street. Neither a banker
nor an economist, Geithner left Kissinger Associates in
1988 at age 27 to go to work at the Treasury and begin
an uninterrupted career in government service (promoted
in 1999 by Treasury Secretary Robert Rubin to under
secretary for international affairs).
Geithner's plan to open the Fed's discount window for the
first time to non-banks stunned the financial community
but received little attention from a Congress in recess,
including presidential candidates preoccupied by Iraq.
John McCain was traveling in Iraq, while Hillary Clinton
and Barack Obama exchanged barbs over who was more antiwar.
An influential statement of support for the bailout came
from Sen. Charles Schumer, who heads both the Joint
Economic Committee of Congress and the Democratic
Senatorial Campaign Committee. Although Schumer is not
known for non-partisanship, he is a New Yorker who is
close to the securities industry.
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The reaction in the hinterland was far less favorable. The
Washington office of the Independent Community Bankers of
America was flooded this week by its members across the
country complaining of discriminatory favoritism toward
their big city brethren. If they had blundered into
financial failure, the community banks complained, they
would not be bailed out, but instead investigated and
prosecuted. "Too big to fail," therefore, becomes "too
big to be punished."
The expense of such an intervention is not a problem
because the Fed, unlike the president and Congress, can
print money. The Bear Stearns bailout, approved in private
by unelected officials, contributes to paranoid grievances
on the left and right that built support for Ron Paul's
presidential candidacy. A Fed official conceded privately
this week that "we may have crossed a line" in jumping
into Bear Stearns -- and that is an understatement. There
is no doubt the American economy is in uncharted territory,
with reverberations that cannot be forecast.
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Copyright 2008 by NextEra Media. All rights reserved.
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