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Publication: Conservative Review
Finance's "New Day"

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                   March 21, 2008

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 

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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