On top of its disturbingly myopic reading of the subprime contagion, the Fed now thinks handing out billions more in loans to the players that created the crisis is really just a private affair. Washington, we have a problem.
When financial institutions were riding a wave of fee-generated euphoria, creating their toxic sludge of subprime investment vehicles, the U.S. Federal Reserve registered few, if any, concerns. The Fed was happy to buy into the idea that the banks and investment houses were headed by shrewd successors to the J.P. Morgan mantel who had discovered a new world of financial instruments that were producing untold wealth –at least for their creators. Even when things started to unravel, official disquiet was muted. Earlier this year, Fed chairman Ben S. Bernanke told a committee of the U.S. Congress that he didn’t expect the meltdown would spread.
Since that time, the subprime contagion has begun to infect every part of the economy. Billions have been lost. And companies from Home Depot and FedEx to Hershey and Starbucks have registered adverse effects from the spread of subprime ills. The Fed has responded by incrementally lowering interest rates and by making, along with other key central bankers across the globe, hundreds of billions of dollars in cash available to shaky financial institutions. The market, which, as we noted earlier this week has become hooked like a street junkie on the need for ever more interest rate cuts, reacted negatively because the most recent drop did not go low enough. To atone for displeasing the gods of Wall Street, the Fed agreed to flood the market with billions more by creating a new “term auction facility” under which it would lend at least $40 billion to banks and investment institutions. The Fed is going to accept as collateral subprime-contaminated investment vehicles. Similar initiatives were announced by the central banks of Canada, England and Switzerland.
What the Fed is up to seems transparent enough: The hope is that, at some point, an ocean of easy cash will wash away the subprime toxin. The Fed and its global counterparts are making cheap money available to the perpetrators of the subprime fiasco so they can extricate themselves from it. Many see it as a bailout. The problem is that cheap money was one of the conditions that caused this mess in the first place. And so was the opaque environment in which these financial poisons were unleashed. Amazingly, the Fed thinks both are still a good idea, because it is making sure the identity of the financial institutions taking advantage of the Christmastime generosity of the world’s key central banker will not be publicly disclosed. And it is doing this when the old Grinch of inflation is just around the corner. Last month, wholesale prices posted their biggest jump in 34 years.
When consumers take out a loan or are late with a payment or overspend, every bank and financial institution with whom they do business is made aware of those details within minutes. And every potential creditor has access to this information. But when the banks that have created a world-class disaster by over extending their own risk are facing gigantic losses and need the help of the American people’s top banker, it’s considered a state secret.
We wonder at this point whom the Fed is actually working for. It failed to oversee and properly regulate the risk content of these loans in the first place. It was AWOL when the symptoms of the crisis first appeared. It neglected to appreciate the need for the openness and accountability that might have prevented the spread of the 21st century’s greatest financial disease. It continues to be caught off guard as to how fast and to where this contagion is spreading. And now it seems to think handing out billions more in loans on the basis of the most dubious collateral paper is really just a private affair. Washington, we have a problem.
Public confidence, which is fundamental to a stable economy, will not be assisted by more backroom deals concocted by a myopic and transparency-challenged Fed working in concert with the players who masterminded the current disaster, which is why we believe the actions of the world’s most crucial central banker in creating what amounts to a private bailout window is the Outrage of the Week.