Fed 'Abandons 75 Years Of Precedent'

Fed Leaders Ponder an Expanded Mission
Wall Street Bailout Could Forever Alter Role of Central Bank

By Neil Irwin
Washington Post Staff Writer
Friday, March 28, 2008; A01

In the past two weeks, the Federal Reserve, long the guardian of the nation's banks, has redefined its role to also become protector and overseer of Wall Street.

With its March 14 decision to make a special loan to Bear Stearns and a decision two days later to become an emergency lender to all of the major investment firms, the central bank abandoned 75 years of precedent under which it offered direct backing only to traditional banks.

Inside the Fed and out, there is a realization that those moves amounted to crossing the Rubicon, setting the stage for deeper involvement in the little-regulated markets for capital that have come to dominate the financial world.

Leaders of the central bank had no master plan when they took those actions, no long-term strategy for taking on a more assertive role regulating Wall Street. They were focused on the immediate crisis in world financial markets. But they now recognize that a broader role may be the result of the unprecedented intervention and are being forced to consider whether it makes sense to expand the scope of their formal powers over the investment industry.

"This will redefine the Fed's role," said Charles Geisst, a Manhattan College finance professor who wrote a history of Wall Street. "We have to realize that central banking now takes into its orbit everything in the financial system in one way or another. Whether we like it or not, they've recreated the financial universe."

The Fed has made a special lending facility -- essentially a bottomless pit of cash -- available to large investment banks for at least the next six months. Even if that program is allowed to expire this fall, the Fed's actions will have lasting impact, economists and Wall Street veterans said.

Fed insiders are just beginning to collect their thoughts on what might make sense for the longer term.

"It has wrought changes far more significant than they were probably thinking about at the time,"

"Long-Term Capital was the dress rehearsal for what happened with Bear Stearns,"

If Congress and the administration do broaden the formal powers of the Fed, it would be the latest in a long history of financial policy made out of a crisis. The Great Depression fueled an array of stock exchange regulation. The 1987 stock market crash led to curbs on stock trades. The 2002 corporate scandals led to the Sarbanes-Oxley Act.

And after the panic of 1907, a National Monetary Commission was formed to figure out how to prevent such things from happening again. Its crowning achievement: The creation of the Federal Reserve.

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Over $200 billion yesterday (including TIO and TAF): Slosh report

The way that LEH is acting... Looks like another weekend Fed Luau is coming up with LEH as the "guest" of honor...

If I understand this correctly , the " bottomless pit of cash " is from taxes siphoned off from the working men and women of this country so these parasites can continue their extravagant lifestyle. The House of Representatives of the U.S. Congress has abdicated its fiduciary role and we are to stand idly by while an unelected ( and seemingly unaccountable) cadre of bankers have a party . Screw Bear Stearns . Abolish the Federal Reserve . Impeach all members of Congress unwilling to abide the oath to uphold the Constitution. Enough is ENOUGH .

Yep, starting to look like WEEKEND(luau) at BENNIE'S... Credit Default Swaps on LEH and C are rocketing higher.... Not a smart idea to fade the bond market.... not at all.

Edited by SemiBizz, 28 March 2008 - 10:32 AM.

" bottomless pit of cash " is from taxes siphoned off from the working men and women

Not necessarily.
It could be like a 4 for one stock split where the dollar is now worth 25 cents.

Bulls have a friend in the FED! Bears have a friend in REALITY CHECK! <Corporate profits trend> <Consumer spending> <job creation> <Housing inventory> <foreclosures> <Sub-prime bonds> <Derivatives> <Oil/Gasoline prices> <Food prices> <US dollar> <Imported goods prices> <Trade deficit> <Budget deficit> <Iraq> <Afghanistan> <Al Qaeda> <Chavez of Venezuela>

Let's talk about doom and gloom; The transfer of this private insolvency might eventually render US gov't insolvent. The LT Treasuries will crash once they discover that the Fed has been already buying the illiquid MBS debt and they can't sell them anymore. Nobody sees that the consequences of the Fed's actions of not letting go and rescueing one bubble after another will eventually come back to not even fund the basic gov't operations without promising some significantly higher rates. The corporations might find it comforting right now that the Fed is doing what it has no other choice to do, they will not be able to compete in earnings growth against the high rates, if the Treasuries are forced to sell off in a fragile economy mainly because of the lack of confidence... When I say these, I always think that there will be some sort of checks and balances to prevent these kind of extreme distortions, but the measures the Fed is forced to take right now really make some of the long term effects somewhat more obvious; $200B in 'temporary repos', $30B indirect equity ownership in the investment company funds, these are not usual events. In fact, they are all bubblish, no real asset is really being produced out of these monetary maneuvers... There is probably no real economic model to analyze all of these out there, but the common sense suggests so many of these effects will not be seen until the situation goes beyond out of control again like the mortgage and leveraged buy out mania...

Considering our defense budget is 500 million plus per year, the Fed amount seems small to save the financial system.

Considering our defense budget is 500 million plus per year, the Fed amount seems small to save the financial system.

$500 Million Defense budget would be a bargain
Actually it is closer to $500 Billion

But if I understand it correctly, it is a smaller proportion of National GDP
than most of history except WWII years.

Considering our defense budget is 500 million plus per year, the Fed amount seems small to save the financial system.

The housing bust could cost over 1T dollars, it is just a loss. The defense budget actually helps the economy by providing jobs and economic activity even though for a debt and cost to the tax payers...