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WASHINGTON: A deepening economic crisis has led to
unprecedented actions by US policymakers that raise questions about
how far government regulation should go in a free-market economy,
analysts say.
The Federal Reserve, in addition
to dramatically cutting interest rates, has opened up its massive
reserves to Wall Street securities firms for the first time since
the Great Depression in an effort to stabilize a jittery financial
system.
This move, along with a
Fed-engineered rescue of troubled investment giant Bear Stearns,
raises the prospect of new supervision of Wall Street firms that had
previously escaped regulators.
“My guess is that the Bear
Stearns deal will unleash a new round of financial regulations,”
says Irwin Stelzer, an economist at the Washington-based Hudson
Institute.
“If federal money flows, can
regulation be far behind?”
Allan Meltzer, a professor of
political economy at Carnegie Mellon University, says the Fed
agreement to guarantee $29 billion in troubled Bear Stearns assets
was a mistake.
“This action transferred
potential losses from the market to the taxpayers,” he said. “I
do not believe the present system can remain if the bankers make the
profits and the taxpayers share the losses.”
John Makin at the American
Enterprise Institute said the Fed rescue was “an unprecedented
step, roughly equivalent to the use of emergency Fed powers not
employed since the Great Depression,” and says that with the aid,
regulation is inevitable.
Treasury Secretary Henry Paulson,
a former chief executive at Wall Street titan Goldman Sachs, said
the collapse of Bear Stearns highlights the need to think about
regulation of securities firms on the same terms as banks.
Paulson said his office is
working on a “blueprint for regulatory reform” that will address
the question.
“This latest episode has
highlighted that the world has changed as has the role of other
non-bank financial institutions, and the interconnectedness among
all financial institutions,” he said.
“These changes require us all
to think more broadly about the regulatory and supervisory framework
that is consistent with the promotion and maintenance of financial
stability.”
Yet some analysts say a new
regulatory scheme may not end the crisis if the US housing market
sees a further meltdown. This has spurred talk about a
government-led rescue with new guarantees for shaky mortgages.
Although the Fed has effectively
assumed billions of dollars in troubled mortgage securities, some
are urging a new effort similar to the 1990s government fund to buy
up bad loans in the savings and loan crisis.
Stelzer said a proposal by
Representative Barney Frank and similar ones from Democratic
presidential candidates on this are “gathering support even from
free-market conservatives.”
The Frank plan “would have the
government insure new mortgages that reflect the new, lower value of
the houses,” Stelzer said. “Lenders would take a loss, but not
very different from the loss they would incur if they foreclosed and
tried to peddle the seized property in the already-glutted home
market.”
Some say the unprecedented
intervention by authorities threatens to impede a market correction
and undermines the basic principles of capitalism.
Ed Yardeni at Yardeni Research
said Fed chairman Ben Bernanke “made monetary history” by
opening the discount window and “crossed even further over to the
dark side of financial socialism” by allowing the firms to pledge
illiquid mortgage debt as collateral.
“Comrade Ben is determined that
there will be no financial meltdown and no depression while he is in
command,” Yardeni said. “Given the initial positive reaction in
stock prices last week, I suppose this means that on Wall Street, we
are all financial socialists now.”
Todd Harrison, a former Wall
Street trader who writes a blog on the website Minyanville, argues
that the Fed is placing its balance sheet at risk by assuming
troubled mortgage debt.
But Harrison said the
problems would fix themselves if authorities allowed the free market
to work.
--AFP
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