Bernanke's Financial Rescue Plan

April 6th 2009


A Glide-Path to Destitution

Bernanke's Financial Rescue Plan

By MIKE WHITNEY

Fed chief Ben Bernanke has embarked on a radical and ruinous financial rescue plan. According to Bloomberg News, the Fed has already lent or committed $12.8 trillion trying to stabilize the financial system after the the bursting of Wall Street's speculative mega-bubble. Now Bernanke wants to dig an even bigger hole, by creating programs that will provide up to $2 trillion of credit to financial institutions that purchase toxic assets from banks or securities backed by consumer loans. The Fed's generous terms are expected to generate a flurry of speculation which will help strengthen the banking system while leaving the taxpayer to bear the losses. It is impossible to know what the long-term effects of Bernanke's excessive spending will be, but his plan has the potential to trigger hyperinflation or spark a run on the dollar.

Bernanke's zero-percent interest rates, multi-trillion dollar lending facilities and bank bailouts do not fit within the Fed's narrow mandate of "price stability and full employment". There are also myriad problems with Bernanke's lending facilities which are nothing more than a crafty way of transferring wealth from the Fed to private industry via low interest loans. The Central Bank is not supposed to "pick winners" as it is blatantly doing. Businesses outside the financial sector cannot exchange their downgraded garbage with the Fed for semi-permanent, rotating loans; so why should underwater investment banks and hedge funds get special treatment? The facilities represent a gift to financial institutions giving them an unfair advantage.

Besides the $2 trillion for the Term Asset-Backed Lending Facility (TALF) and the Public-Private Investment Program (PPIP), the Fed will also provide a multi-billion dollar backstop for the FDIC as bank closures continue to snowball and more reserves are needed to shore up the system. That means that the Fed's balance sheet could mushroom to over $4 trillion by the end of 2010. The Treasury has already agreed in principle to assume full responsibility for the Fed's lending facilities (as well as the bailouts of AIG and Bear Stearns) as soon as the financial system stabilizes. By providing loans and US Treasuries to failing companies, instead of capital, Bernanke has sidestepped Congress, thus, undermining the spirit and the letter of the law. Congress has approved a mere $1.5 trillion of the nearly $13 trillion for which taxpayers are now responsible.

http://www.counterpunch.org/whitney04062009.html

Bernanke's zero-percent interest rates, multi-trillion dollar lending facilities and bank bailouts do not fit within the Fed's narrow mandate of "price stability and full employment".

Yes, the Fed should never consider preventing economic collapse. It should stick to inflation and employment. This is a paleoconservative position from the 1930s.

is that what the Fed is doing is blatantly illegal. We still are a nation of laws, are we not?

if its actions are not directly related to inflation or employment? For example, when it sets interest rates? I don't think that anyone really believes that.

This is a long-term claim of conservative populists who want a completely unregulated economy. The result is that Volcker's monetarist experiment to control inflation was perfectly fine, while lowering credit as a stimulant during a recession (a long-term progressive) is verboten. These people want the Fed want to evaporate and the economy return to the Gilded Age when crashes and bank failures happened with great regularity, and the rich got richer by buying up cheap assets. Or perhaps they don't want that, but are true believers in a laissez-faire economy.

I don't mean to argue ad hominem, but if you're going to argue that the Fed is doing something illegal, it's got to be more than a phrase from its initial mission 97 years ago under Woodrow Wilson.

The "Fed Uncertainty Principle" cites a big one (the Bear Stearns intervention), and that one is a year old already.