Criticisms continue today of The Fed, and many "free marketeers" i.e. Milton Friedman of the Chicago School have always been critical of its operations.
Last weeks near market credit meltdown was temporarily averted by The Fed pumping @$62 billion cash into the markets http://online.wsj.co...]:
"Central banks pumped money into distressed markets for the second day to relieve strains in money markets, while investors concluded the Federal Reserve is increasingly likely to cut rates soon and that rate increases in Europe and Japan may be deferred.Explaining that it was "providing liquidity to facilitate the orderly functioning of financial markets," the Fed injected $38 billion, following Thursday's $24 billion. The European Central Bank, saying that its "liquidity-providing fine-tuning operation" was aimed at assuring orderly market conditions, added $83.56 billion following the $130 billion it injected to euro-zone markets Thursday."
Irony: Fall-Out From the "Ownership Society"
Seems creditors were so willing to fulfill the "Ownership Society" promoted by the current administration, that they failed to dot the "i's" and cross the "t's" when it came to granting loans. Fast and loose lending policies gave way to under-secured/non secured mortgages. Mortgage based securities were bundled and gobbled up by hedge funds/investment firms. Many are now left holding a bag in default.
From the Wall Street Journal:
Fallout from the intensifying credit crisis stretched from a French bank to the largest home-mortgage lender in the U.S., triggering unusual central-bank interventions and driving the Dow Jones Industrial Average to its second-worst drop this year.The troubles demonstrated both the global reach of the crisis and its impact on a widening circle of markets and companies. The first jolt came from French bank BNP Paribas, which said early in the day that it was freezing three investment funds once worth a combined $2.17 billion because of losses related to U.S. housing loans. That prompted the U.S. and European central banks to inject cash into money markets to keep interest rates down.
So here we have financial markets teetering on the edge of collapse (from their own doing)- and being supported by The Fed's massive infusion of cash to maintain stability: A SAFETY NET.
Thanks for the excellent synopsis. Here is a related "dialogue" that I posted in bonddad's thread over at DailyKos today:
What do a magic wand, a video game, and liquidity have in common? Here is more or less how it works:
Fed Chairman Ben Bernanke: "Whoosh. Whoosh. Whoosh. I hereby wave my Magic Monetary Wand three times and create $38 billion in liquidity to bail out big investors in volatile markets."
Big Boys (Hedge Fund Managers, Derivatives Speculators, Risk-loving Banks, Highly-leveraged Investment Firms, and High-yield-seeking Pension Funds): "Thanks, Ben. Now we can continue with the looting for a little while longer."
Reality: "But, but, but...isn't that $38 billion just a digital signal of intent, sort of like a move in a multi-player video game? I mean, there isn't anything real about that $38 billion, is there? It's just bits on the Fed's central file server, digital money created by fiat out of thin air. And doesn't creating digital money out of thin air threaten to increase already rising 'headline' inflation and to accelerate the ongoing decline of the dollar against other currencies? What's that vague memory I have about Gresham's Law?"
Bernanke: "Shhhh. This isn't about reality. It's about confidence. As long as the Big Boys consider the pyramid to be sustainable, it will be sustained. My job is to sustain it for as long possible so that the looting may continue. Now just shut up, so that the Big Boys can continue to make their speculative millions and billions unimpeded, while they avoid ever paying more than 15 percent of the net in capital gains taxes. My job is not to deal with reality. My job is to create reality. The White House told me so. And we'll blame the Democrats if the bubble bursts."
Reality: "What about addressing the underlying structural problems, like low savings, deindustrialization, the current account deficit, the federal budget deficit, decaying infrastructure, inadequate health care, faltering public education, and the increasing disparities of income and wealth?"
Bernanke: "Nah. Solving those problems would require ingenuity and sacrifice. All that we know how to do is wave the Magic Monetary Wand. We pump out digital repurchase agreement bits today, and we hope for them to get pumped back to our file server on the next business day. It has worked up until now, hasn't it? Besides, Dick Cheney said that 'deficits don't matter.'"
Big Boys: "Yes indeedie. Let the good times roll! All is for the best in this best of all possible markets. Pass around the cigars. Another cognac, perhaps?"
Reality: "Thanks, Ben. Thanks, Big Boys. Just askin'. But could you explain once again how the subprime securities market and the various kinds of derivatives markets are different from an old-fashioned Ponzi scheme?"
Bernanke and Big Boys: (in unison) "Shhhh."