Op-Ed: A Debt-Free Federal Government?
Artificially low interest rates could revolutionize economy.
Having been an early supporter of "Uncle" Ben Bernanke, I'm as shocked as anyone over this current, boneheaded move. Add 2 disturbing trends -- the fall off of the US dollar and the rise in gold -- and the good the Federal Reserve was doing is now being reversed.
Bailing out the banks to keep liquidity in the system, and making sure the currency remains viable, is the duty of the Fed. It can't be held responsible for Congress's overspending, or for the Bush administration's very expensive war. But aside from the need to keep liquidity in the system, the Fed needs to make the banking system practicable.
Henry Paulson certainly strong-armed the major banks into participating in the bailout. Following this line of reasoning, one could assume that forcing smaller banks to fail -- while also owning shares in bigger banks -- would give the government de facto control. No matter - the outcome will be tighter control of and greater disclosure for all banks
However, it's not necessarily the banks that brought on the current crisis. The greater liability is from the hedge fund secondary security markets that created a compounding liquidity and forced asset sales problems.
The question is: What happens next? I'm torn on this one. The perennial bears will growl that they saw this crisis coming since 1968, or 1971, or... Well, you get the picture. But I don't buy that the system is flawed any more than I would suggest people not invest just because one individual stole $50 billion via a bogus hedge fund.
One has to look at the driving forces, and ask why the Fed is acting inappropriately. Maybe the problems that the Fed faces are bigger than anyone can appreciate. By going to a zero-interest rate, it's attempting a last-ditch effort to float banks in an environment where there's not enough liquidity to bail them all out. When the crisis hit, Alan Greenspan criticized Paulson's request for $700 billion and said it should have been $7 trillion.
I know there are some who love to bash Greenspan. But Greenspan did a good job managing the Fed. He left Bernanke with a loaded gun after taking the banking system through the dot-com crash. He told Congress and the administration to stop spending - and became the target of adverse publicity as a result.
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