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Reply #27: Rescue Tests the Credibility of the Fed [View All]

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UpInArms Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Mar-18-08 07:18 AM
Response to Reply #22
27. Rescue Tests the Credibility of the Fed
http://www.nytimes.com/2008/03/18/business/18fed.html?e...

WASHINGTON — Far more than at any time before, the Federal Reserve is putting its vast resources and its reputation on the line to rescue Wall Street’s biggest institutions from their far-reaching mistakes.

<snip>

And no one knows how much the Fed could lose if the borrowers fail to repay their loans or whether hundreds of billions of dollars will ultimately have to come from taxpayers to shield the nation’s financial system from ruin.

In recent weeks, the central bank announced a series of emergency short-term loan programs that totaled about $400 billion. But on Sunday, Fed officials raised the stakes by offering investment banks a new loan program without any explicit size limit.

These moves, along with a $30 billion credit line to help JPMorgan Chase take over the failing Bear Stearns, is fraught with more than financial risk.

The biggest danger is damage to the Federal Reserve’s credibility if it is seen as unwilling to let financial institutions face the consequences of their decisions. Central banks have long been acutely sensitive to “moral hazard,” the danger that rescuing investors from their mistakes will simply encourage others to be more reckless in the future.



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