Is 2008 the dawning of a new age in government intervention? Notorious in its uncanny ability to generate crisis, has it now moved in a direction to innovatively preventing and/or fixing them? Is it too the model for a new Washington job title?
Indeed, one would answer yes to all if comparing the old and the new. Recent proxy examples respectively being the “Crisis Twins” - Iraq and Credit.
With little thought (if any) and planning as to what happens after “Mission Accomplished”, the U.S. went barreling into Iraq on a wing and a prayer, if not downright arrogant expectation there would be a rose petal parade in the streets of Mosul, Tikrit, Fallujah and every other major Iraqi city after 5 days of fighting. Note I did not include Baghdad as it is to easy for a rose petal parade to be staged.
That 5 days has now turned into 5 years and will be 15 before anyone blinks an eye, based on current “exit?” strategies. Quite frankly, due to partisan politics and an unwillingness by Congress to put those aside and instead do what’s right for the country and the American people, there has not yet been a “sensible” exit strategy proposed. That is why 15 could turn into 30. In fact, make it 99 as Mr. McCain is probably dead-on right.
On the other hand, in another government branch, in this case the Fed, it too created its own home brewed crisis with its “money printing giveaway”, vis-à-vis its 1% fed funds rate in the early part of this decade. The ensuing Credit Crisis the byproduct, materializing in the form of the housing bubble, sub-prime, mortgage bond, etc. disasters.
Analyst Note: It is understood the“Fed” is not an agency/department of the Federal Government like the Treasury. However it a “quasi-U.S. government” entity as the Central Bank of the U.S. For these discussion purposes then, it is appropriately considered in the “government camp”.
Yet unlike the same government’s executive and legislative branches that created Iraq not taking really strong, sensible and substantive steps to end it, the Fed is now taking bold and innovative steps to end the same crisis it created. What’s changed with the Fed however is the team. It’s very different in makeup and approach than the predecessor one responsible for creating the mess. Perhaps a lesson here on how to fix Iraq – new team, across the board – Oval to Congress. A clean sweep.
Many say the government should stay out of the “market”. Indeed a meritorious aspiration, albeit one entirely utopian, unrealizable, unrealistic and incredibly myopic in its viewpoint. Fact is the financial markets were pre-disposed to collapse had the Fed not stepped into the Bear Stearns situation. Was Bear Stearns sacrificed? Absolutely. But, what the mainstream public and media fail to realize, it was for the common and better good of the whole. The simple and clear decision being that it is better to lose one company then an entire industry underpinning the economy.
In fact, “Main Street” is not and cannot ever be independent but rather inexorably linked to "Wall Street". If Wall Street fails, Main Street will soon follow. Financial market stabilization, even at some cost, is in Main Street’s best interest. A “run on the bank” is not.
Had the Fed not stepped in, the “bank run” on Bear Stearns would have led to an industry wide “confidence crisis”, triggering a domino-like collapse of the financial system and total wipeout of every individual citizen’s personal wealth. If that happened, all the current self righteous “the government should stay out” naysayers would not be so boisterous. In fact, and with quite ironic hypocrisy, they’d predictably be screaming a different gripe, clamoring “Where was Bernanke?”
Interesting how values and attitudes change when a previously contentious front page issue hits home.
It would seem then, being Fed Chairman is akin to being a husband. There’s no win in what you do. You’re damned when you do, and you’re damned when you don’t. At least though, Mr. Bernanke doesn’t have to go home at night to his spousal critics.
Effectively then, the Fed prudently quarantined the problem by putting a “ring fence” around Bear Stearns, thereby halting a global contagion, and an accompanying financial pandemic.
Analyst Note: For those that "myopically" see the Fed action as nothing more than backstopping (not bailout – as any Bear Stearns shareholder will attest) Bear Stearns liabilities with taxpayer money, open your eyes....better yet, WAKE UP!