Tonight, all eyes will be on President Obama’s nationally televised speech before a joint session of Congress,
The real money, however, will be watching this morning’s economic briefing of the Senate Banking Committee by Fed Chair Ben Bernanke.
[img]374|left|||no_popup[/img] During the past six months, especially since the collapse of Lehman Brothers, Big Ben has been pretty busy. He’s had his hands full, and he seems to have his fingers in almost every pot.
Greenspan may have been the master of double-speak, but Bernanke has the market cornered on the Capitol double-take. Every time you turn around, there he is again.
It’s as if Fed Chair has a clone.
On his watch, the Federal Reserve Bank has been transformed from a little-known mechanism to ensure financial system liquidity and uniformity, to more of a Soviet-style central bank.
Is Its Power Truly Unlimited?
Under Bernanke’s management, the Fed charter appears to know no bounds.
To date, Bernanke’s Fed has extended more than a trillion dollars to troubled financial markets and banks. In the coming months, as the financial crisis deepens, there likely will be more of the same.
During the bad old days of the Soviet Union, before the oligarchs dominated, everything in the economy ran through the Central Bank. Every loan for every collective enterprise was approved and disbursed through the GOS, the state bank.
It’s almost as if the Fed is reverse-engineering the economy. With Bernanke’s imprimatur, it has stepped into nearly every major economic breach.
When the short-term credit markets went south, the Fed took over. When Fannie and Freddie were able to sell their bonds, the Fed took up the slack by buying them. Very soon, the Fed will likely step in to prop up credit card debts, car loans, student loans and maybe even loans to small businesses.
Slowing Rather Than Speeding up the Pace
Most analysts believe that the Fed’s actions, under its expanded role, have slowed the demise of the economy. When Congress and the President have been sluggish to react, or did not have the facility to intervene, Bernanke’s Fed has quickly come to the rescue.
Right now, it’s working. The Fed’s actions have brought relative stability to a financial system facing imminent disintegration.
But what will happen if the Fed really starts losing money?
The Fed is a bank. Like any other bank, it has to remain solvent or close its doors. When that happens, the Fed will lose its critical ability to intercede and be forced to turn to the taxpayers for a bailout.
Today, it’s rumored AIG will report another $60 billion in losses relating to the insurance giant’s ill-conceived backing of exotic debt instruments. This flailing financial octopus already has gotten $145 billion in taxpayer funds to keep it from going under.
Remember, There Is a Limit
If the government does not have adequate monies remaining from the rapidly dwindling TARP fund, then it may be forced to turn to the Fed for a solution. Given the expansive role now being played by the Fed, providing additional bailout assistance to AIG may not be beyond its reach.
At some point, policymakers at the White House, Congress and the Fed are going to realize that central bank can only stretch its safety net so far. When that day comes – and it’s coming soon – even the Fed will be forced to acknowledge that if it’s going to save itself, some banks must be broken up or liquidated for the good of the entire financial system.
If it doesn’t, they’ll be no one left to save the Fed other than you and me.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
