Some say the world will end in fire / Some say in ice . . . – Robert Frost
AND some say it will end be cause of subprime mort gages. But for those who cultivate fears of catastrophes as excuses for expanding government supervision of others’ lives, the bad news is that the world is not going to end. Today’s untethered Federal Reserve will, however, make the muddle-through interesting.
Congress created the Federal Reserve pursuant to its constitutional power “to coin money” and “regulate the value thereof.” But suddenly the Fed is undergoing radical “mission creep.”
The description of the Fed as the “lender of last resort” is accurate without being informative. Lender to whom? For what purposes? Last resort before what? Did the bank “lend” $29 billion to Bear Stearns, or did it, in effect, buy some of the most problematic securities owned by Bear? If so, was this faux “loan” actually to JP Morgan Chase?
In 1979, when the government undertook to rescue Chrysler, conservatives worried not that the bailout would fail but that it would work, thereby inflaming government’s interventionist proclivities and lowering public resistance to future flights of Wall Street socialism. It “worked”: Chrysler has survived to endure its current crisis.
The fallacious argument in 1979 was that Chrysler was then “too big to be allowed to fail.” Today’s argument is that Bear Stearns was so connected to the financial system in opaque ways that no one could guess the radiating consequences of its failure – the financial consequences or (sometimes much the same thing) psychological.
But what is now the principle by which other distressed firms will elicit Fed interventions in future uncertainties?
The Fed has no mandate to be the dealmaker for Wall Street socialism. The Fed’s mission is to preserve the currency as a store of value by preventing inflation. Its duty is not to avoid a recession at all costs; the way to get a big recession is to engage in frenzied improvisations because a small recession (aka, a correction) is deemed intolerable. The Fed should not try to produce this or that rate of economic growth or unemployment.
After the tech bubble burst in 2000, the Fed opened the money spigot to lower interest rates and keep the economy humming. And since the bursting of the housing bubble, the Fed has again lowered interest rates, which for now are negative – lower than the inflation rate, which the open spigot will aggravate.
A surge of inflation might mean the end of the world as we have known it. Twenty-six percent of the $9.4 trillion of US debt is held by foreigners. Suppose they construe Fed policy as serving an unspoken US interest in increasing inflation, which would amount to the slow devaluation of the nation’s debts. If foreign holders of US Treasury notes start to sell them, interest rates will have to spike to attract the foreign money that enables Americans to consume more than they produce.
If Congress cannot suppress its itch to “do something” while markets are correcting the prices of housing and money, Congress could pass a law saying: No company benefiting from a substantial federal subvention (which would now include Morgan) may pay any executive more than the highest pay of a federal civil servant ($124,010). That would dampen Wall Street’s enthusiasm for measures that socialize losses while keeping profits private.