Wall Street bailout aid questioned at Fed event

Saturday August 23, 3:38 pm ET
By Jeannine Aversa, AP Economics Writer

Fed conference speakers say US central bank too responsive to Wall Street on bailout issues

JACKSON, Wyo. (AP) -- Do Washington policymakers listen too much to Wall Street? A possible bailout of Fannie Mae and Freddie Mac, on the heels of similar action involving investment firm Bear Stearns, seems to send a loud signal to financial companies that the government will clean up their messes.

That's the feeling of some analysts and academics here Saturday, the final day of a high-profile economics conference. The Federal Reserve's handling of the worst financial crisis to hit the country in decades spurred much debate.

"The Fed listens to Wall Street," said Willem Buiter, professor of European political economy at the London School of Economics and Political Science. "Throughout the 12 months of the crisis, it is difficult to avoid the impression that the Fed is too close to the financial markets and leading financial institutions, and too responsive to their special pleadings, to make the right decisions for the economy as a whole," he wrote in a paper presented to the conference.

Critics like Buiter worry that the Fed's unprecedented actions -- including financial backing for JPMorgan Chase & Co.'s takeover of Bear Stearns Cos. -- are putting taxpayers on the hook for billions of dollars of potential losses. They also say it encourages "moral hazard," that is, allowing financial companies to gamble more recklessly in the future.

Fed Chairman Ben Bernanke, who spoke to the conference on Friday, defended the Fed's actions, saying they were "necessary and justified" to avert a meltdown of the entire financial system, which would have devastated the U.S. economy.

The important thing many people don't seem to understand is that the Fed is not a part of the government. The Federal Reserve is made up of the world's largest banks, so is it any surprise that they come running to Wall Street and the financial industry? When you see what the Fed is made up of, it really isn't. It's pretty easy to throw other people's money away with bailouts and it sure isn't difficult to turn on the printing presses and churn out billions of dollars of new bills at the expense of the value of the currency. As long as this connection is ignored by the public the bailouts and printing of the money will continue. The Fed does not control interest rates for the individuals in the country but rather for the banking institutions in the country. Whether it's Alan Greenspan or Ben Bernanke, the end aim of interest rate manipulation has been to protect and strengthen the banking institutions. With a fiat monetary policy, this is doable for a bit. Heck, many people enjoy the bubbles while they last and even accept that a bubble economy is created from the free market. As long as there is a central bank in control of money and credit the economy is not free. Even Alan Greenspan admitted this.

Until people understand the connection of the Fed to Wall Street it will be difficult to have a meaningful debate on this subject. But, it is good to see some economists in the above article are questioning the Fed's actions. What's funny to me is why people don't see Freddie and Fannie's unlimited line of credit to the Treasury as a bailout. If that's not a bailout, what is?