The Fed in Hot Water

The Fed has finally came clean. It now admits it bailed out Bear Stearns – taking on tens of billions of dollars of the bank’s bad loans – in order to smooth Bear Stearns’ takeover by JPMorgan Chase. The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed. The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout. 

The End of Gradualism?

Back in 2004, on the heels of the Fed’s tightening cycle, Ben Bernanke gave a speech in defense of “gradualism”—the idea that, under normal circumstances, economies are better served when central banks adjust their policy rates gradually, moving in a series of moderate steps in the same direction.


With monetary authorities around the world preparing for their exit, there are fears in some circles that a new Armageddon is in sight. Volatility could shoot up, it is argued, as investors try to figure out the impact of a synchronous global tightening on their respective asset classes—let alone the difference between, say, the effective fed funds rate and the interest on excess reserves!

Should the Fed Stay in Regulation?

One of the central issues in the postcrisis effort to reform our regulatory infrastructure is who should do the regulating. The answer to some in Congress is none of the above:

“… under consideration is a consolidated bank regulator, one aide [to Alabama Senator Richard Shelby] said. The idea is supported by [Connecticut Senator Christopher] Dodd, who proposed eliminating the Office of Thrift Supervision and Office of the Comptroller of the Currency, and moving their powers, along with the bank-supervision powers of the Federal Reserve and the Federal Deposit Insurance Corp., to the new agency.

“Negotiators are still deciding how to monitor firms for systemic risk, including how to define and measure it, what authorities to give a regulator and which agency is best suited to get the power, a Shelby aide said.”

The Fed’s Discount Rate Hike

The Federal Reserve Board announced on Thursday that it is raising the interest rate at which banks borrow from the Fed’s discount window to 0.75%, a 25-basis-point increase, and intends to return discount lending primarily to the traditional overnight loans. “The rate hike cycle begins,” declared 24/7 Wall St, and Business Week reported:

Treasuries fell, pushing yields to the highest levels in at least five weeks, amid concern the Federal Reserve’s increase in the discount rate signaled policy makers are moving closer to lifting benchmark borrowing costs.

Letter to Ben Bernanke

Dear Ben,

By now you have realized that Federal Reserve policy has become highly politicized. While the media is placing you squarely in the middle of that development, I realize that the shift has been occurring since long before you were appointed Chair, and even Governor, as the Federal Reserve has found it worthwhile and expedient in the past two decades to work directly with Congress and the various Administrations on a number of key issues, ranging from housing policy to addressing financial markets hiccups to maintaining steady economic growth. Unfortunately, that era is over and the Federal Reserve will be responsible for some tough decisions.

No to Bernanke

Paul Krugman’s speaking notes are here. Ben Bernanke’s are here.

Bernanke’s speech is largely a defense of the Federal Reserve’s monetary policy in the past decade, and therefore of the old Greenspan Doctrine dating back to the 1996 “irrational exuberance” speech–the idea that monetary policy is not the right tool for fighting bubbles. The Fed has gotten a lot of criticism saying that cheap money earlier this decade created the housing bubble, and I think it certainly played a role.

Ben and his Avatar

I can’t help noting the coincidence of Bernanke’s nomination as both “Man of the Year” and “The Definition of Moral Hazard” in the same week as the release of Avatar… And while Ben has probably settled on which “body” he belongs to, representatives of the voting public have yet to make up their mind.