The Bernanke Call--II

OpinionJournal.com ^ | August 11, 2007 | Editorial Staff

[gpapa]

Financial markets were roiled again yesterday, with the Federal Reserve and other central banks stepping in to bolster liquidity in the wake of the subprime credit seizure. Serving as lender of last resort in these conditions is the proper function of central banks. But going further--with an emergency rate cut, as some in the market seem to be anticipating or hoping for--carries the risk of introducing even greater moral hazard into the financial system.

It's worth recalling in this connection that the root cause of this credit correction was the Federal Reserve's willingness to keep money too easy for too long. The federal funds rate was probably negative in real terms for close to two years between 2003 and 2005. This led to a misallocation of capital into real estate and certain mortgage instruments that is currently being worked off. For the Fed to take its eye off the price-stability ball now in response to short-term market gyrations would only compound the original policy mistake.

[ConservativeMind]

“...in these conditions...”

This isn’t the end of the world, people. Let the companies that risked too much for gain, fail as needed.

Don’t bail out idiots thinking this “calms” us.

[Moonman62]

Murdoch paid money for these guys?

[Moonman62]

The Federal Reserve has kept rates too high for too long. What happened the past 48 hours is central banks around the world injected money into their funds systems to try to maintain their target rates. It wasn’t done out of generosity or to bail out anybody. Had they not done so, there would have been failures way beyond the companies you seem to hate.

[blade_tenner]

It's worth recalling in this connection that the root cause of this credit correction was the Federal Reserve's willingness to keep money too easy for too long. The federal funds rate was probably negative in real terms for close to two years between 2003 and 2005. This led to a misallocation of capital into real estate and certain mortgage instruments that is currently being worked off.

I never understood the "genius" of Alan Greenspan... the low interest rates, the low margin requirements, the encouragement of fiscal promiscuity for short-term economic gain... we're heading for a short-term world of hurt..

[cherry]

not that I listen to him all the time, but Bob Brinker doesn’t seem to like Greenjeans either.....

[blade_tenner]

not that I listen to him all the time, but Bob Brinker doesn’t seem to like Greenjeans either.....

I haven't been too impressed with Bob lately... a couple of months ago he was ridiculing the idea of the sub-prime market shake-up being a serious threat to the economy.. guess he hadn't heard of the "collateral debt obligation" burdens of the big hedge funds...

[jiggyboy]

Wait, which is it, “not a bailout” or “there would have been failures if they hadn’t”.

[advance_copy]

Senator Hillary Clinton has proposed a $1 billion federal bailout fund for homeowners at risk of default and foreclosure.

The RAT socialist wants to turn bad mortgages into wealth redistribution.

[Moonman62]

I think you need a bailout.

[Moonman62]

I think you’re blaming the wrong person. Greenspan was one of the crankiest Fed chaimen there’s ever been.

[rebel_yell2]

Please elaborate. What companies would have failed? And how can you state this with any confidence?

[jiggyboy]

LOL always the same old name calling, huh

[aShepard]

...................I never understood the “genius” of Alan Greenspan... the low interest rates, the low margin requirements, the encouragement of fiscal promiscuity for short-term economic gain....................

Greenspan; Clinton through Bush; kept interest rates low to counter the tech blowout from 1999-2000, then the recessionary influences from 9/11 in 2001-2002.

Greenspan and the Fed shouldn’t have to take the blame for mortgage originators/lenders/aftermarket buyers, to juice the system, come up with new ways of preying on the under-collaterized buyer, finding risk takers to off these new loans to.
All of these financial players are not un-sophisticated hayseeds that are unable to read the loan docs of the package that they bought - then sold on the aftermarket, to downmarket hayseeds - who then packaged loans to further downmarket hayseeds.

No! Everyone is now covering their asses for the collective bad decisions, looking to shift blame to someone upstream. Eventually, once Congress re-convenes in September,

The fault of the worlds’ total economic collapse, all the hungry women and children, the poor, the blind, the homeless, will be blamed on George Bush.

Just ask General Pelosi!

[Dems_R_Losers]

Typical Wall Street Journal hooey.....God forbid people should actually invest money in housing, you know, something people actually need....it oughta be going into more Enrons and WorldComs and Michael Milken junk bond scams...

The Journal has the whole thing exactly backward. The Fed is responsible for the bust. It has an inherent conflict of interest, because it is the central bank but is also the primary regulator of the largest bank holding companies. As the mortgage market spread out, more players started taking business away from those big banks and investors chose to put their money into non-bank mortgage-backed securities. The big banks wanted this bust to happen in order to drive out the big nonbank mortgage players like New Century. It worked. After this panic is over and the dust settles, the only nonbank player left in the mortgage business is going to be GMAC. They can't get at GMAC because it is privately owned.