Bailout of American Banks Paid for by the Entire World
Date: Friday, September 21 2007
A Fed Panic and a Massive Bailout of American Banks Paid for by the Entire World
by Prof. Rodrigue Tremblay
Global Research, September 21, 2007
"Manias, panics, and crashes are the consequence of an economic environment that cultivates cupidity, chicanery, and rapaciousness rather than a devout belief in the Golden Rule." –
Peter L. Bernstein, Foreword to Manias, Panics, and Crashes (4th ed.) by C. P. Kindleberger
"In a crisis, discount and discount heavily."
Walter Bagehot (1826-1877), British economist
"The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting."
William McChesney Martin (1906-1998), Fed Chairman (1951-1970)
"The dysfunctional state of American politics does not give me great confidence in the short run.''
Alan Greenspan, Fed Chairman (1987-2006)
The mismanagement of money and credit has led to financial explosions over the centuries. The causes, cures and consequences of such financial catastrophes are most often repetitive. Indeed, such financial collapses are usually the result of the unbridled greed and cupidity of financial operators and of the lack of necessary supervision by public institutions designed to protect the public and the common good. For example, after the October/November 1907 financial crisis in the United States, the idea initially advanced by banker Paul Warburg to establish a partially private and partially public Federal Reserve system of banking was finally adopted, in 1913. The Fed thus became the lender of last resort for banks that find themselves in an illiquid position. It is only after the stock market crash of 1929, however, that the Security and Exchange Commission (SEC) was established, in 1934.
But even with institutions and regulations in place, when they are inoperative, corrupt or ill-adapted, financial crises can still occur. And the current financial crisis is there to remind us of this fact.
On September 18 (2007), the Fed showed some panic and announced a larger than expected half percentage point cut in both the Federal funds rate and in the discount rate , and this after having slashed its discount rate by a half point, on August 17, in order to facilitate borrowing by America's largest banks and to facilitate the bailout of their affiliates and other operators, such as hedge-funds, caught in the sub-prime loans crisis. In so doing, the Bernanke Fed is following Bagehot's advice for aggressive discounting in a situation of financial crisis. The only problem is that Bagehot's rule calls for the central bank to lend copiously in times of critical credit stringency ... but at a high rate of interest. By lending to troubled lenders at reduced preferential rates, the Fed is acting as their "government", i.e. subsidizing their risky loans operations and taxing anybody else who holds American dollars. It is not only attempting to make them more "liquid", but also more "solvable" and less likely to fail.
This raises three interesting questions. First, who pays for the bailout of U.S. financial institutions; second, what are the longer-run consequences of the massive bailout undertaken by the Fed; and third, why did the Fed let the financial situation deteriorate to such an extent that an entire sector of the economy is being clobbered and its collapse is threatening the whole economy.