Betting the Bank
Mar 14th, 2008 at 10:14 am by Susie
Officially, the Fed won’t be buying mortgage-backed securities outright: it’s only accepting them as collateral in return for loans. But it’s definitely taking on some mortgage risk. Is this, to some extent, a bailout for banks? Yes.
Still, that’s not what has me worried. I’m more concerned that despite the extraordinary scale of Mr. Bernanke’s action — to my knowledge, no advanced-country’s central bank has ever exposed itself to this much market risk — the Fed still won’t manage to get a grip on the economy. You see, $400 billion sounds like a lot, but it’s still small compared with the problem.
Indeed, early returns from the credit markets have been disappointing. Indicators of financial stress like the “TED spread” (don’t ask) are a little better than they were before the Fed’s announcement — but not much, and things have by no means returned to normal.
What if this initiative fails? I’m sure that Mr. Bernanke and his colleagues are frantically considering other actions that they can take, but there’s only so much the Fed — whose resources are limited, and whose mandate doesn’t extend to rescuing the whole financial system — can do when faced with what looks increasingly like one of history’s great financial crises.
The next steps will be up to the politicians.
I used to think that the major issues facing the next president would be how to get out of Iraq and what to do about health care. At this point, however, I suspect that the biggest problem for the next administration will be figuring out which parts of the financial system to bail out, how to pay the cleanup bills and how to explain what it’s doing to an angry public.
I think he’s right — once again, it will be a case of
“It’s the economy, stupid!”
Problem is, this time the issue will be more complicated and more intractable.
If the Dems are smart, they will link our wasteful
and expensive wars to the economic crisis, and treat withdrawal as a solution to the economic crisis.
But are the Dems smart?
TGIF Countdown: In 312 days we can start fixing this tattered, broken thing called the economy. George Bush will no longer be doing Herbert Hoover imitations like the one he tried out on the Economics Club of New York today. (And yes, if the Dems are smart they’ll start linking the economic crisis to the war NOW, otherwise they’ll get all the blame later.)