THE FED'S INVOLVEMENT IN THE FINACIAL SECTOR:
As one by one some of the nation's (and the world's) largest banks and financial institutions collapse, the Federal Reserve and the government have been forced to step in and involve themselves in the business world in unprecedented ways. The Fed's level of involvement, certainly, hasn't been seen since the Great Depression, and perhaps it even outstrips that economic disaster. But is the Fed reaching too far? Most of our readers (60%) don't think so. In fact, they believe the Fed's actions were necessary to keep things afloat. Only 40% think the Fed has gone too far in its involvement in the financial sector. Kevin Welsh, a senior vice president with CB Richard Ellis, is with the majority and applauds the actions of Fed Chairman Ben Bernanke. Here are his thoughts:
"The financial system in general is in uncharted waters and I don't think anyone in their wildest imagination thought, when the economy was chugging along, thought we'd be where we are today. The Fed had to take unprecedented action to address what are arguably the worst liquidity and credit crises in the history of our country. I applaud the Fed for everything they've done. They pushed the federal funds rate down to 2% and it wasn't doing anything to loosen up the market, because really what you're dealing with here is a crisis of confidence between the financial institutions. The financial institutions do not have the confidence in one another to make loans because they're not sure of the collateral, and that short-term lending is really what our system is based on. That has effectively shut down.
"The Fed has basically become the lender of last resort. All the programs that it has implemented, the different lending facilities that have been made available to the banks and the investment banks and what it's done in terms of guaranteeing a portion of the Bear Stearns deal with JP Morgan, it's all unprecedented, but these are initiatives that had to be taken to attempt to keep the financial system from collapsing.
"People are worried that the Fed's actions are protecting companies from their risky investments. They're afraid that if people aren't made to pay the price for risk, then they'll go out and do whatever they want and not adequately valuate risk. But that's not, in my opinion, what the Fed has done here. What the Fed has done is stepped up and done what they had to do to keep the financial system as liquid as possible.
"I applaud [Federal Reserve Chairman] Ben Bernanke and [Treasury Secretary] Henry Paulson because we'd be in a lot worse shape without the stewardship and the leadership that they have exhibited over the last six months. They haven't lowered the federal funds rate beyond 2%, even when oil was pushing $140 a barrel and commodity prices were hitting all-time highs. He was being criticized because people were afraid of inflation and the European central banks were pushing their rates higher, but Bernanke didn't give in to political pressures.
"Now we're dealing with the rescue plan. Notice I don't use the word bailout because I don't believe it's a bailout at all. This is something we need to do, and hopefully it'll turn out to be a good investment for the country. The key right now is for financial institutions to regain confidence in one another. The idea behind the rescue plan is to make $700 billion available to the government or any entity that administers it to purchase the mortgage securities of various financial institutions and remove them from the balance sheets. This will make the balance sheets healthier so that those institutions can start lending to each other, which restores confidence in the system.
"If the bill gets passed—and I do think it will because the economic impact if it doesn't is going to be tremendous—the question becomes, how quickly will the system get back to normal functioning levels? We don't know exactly how this is going to work, how they're going to buy the securities, but there are a lot of smart people out there who'll. Right now we need to get the system back online and functioning again, and I don't think there's any question the rescue plan is central to that."
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