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Fed chief: Gov't needs more power when firms fail



July 12, 2008 – Comments (0)

Fed chief: Gov't needs more power when firms fail

WASHINGTON - Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told Congress Thursday that new regulatory powers are needed to insulate the national economy from damage if a big Wall Street firm collapses.

Their recommendations were part of a broader debate before the House Financial Services Committee about the best ways to revamp the country's antiquated regulatory system. The idea is to brace the system to better respond to modern-day crises like the housing and credit debacles that have badly bruised the economy.

Both Bernanke and Paulson endorsed creating new procedures by which the government can guide an orderly liquidation of a failing investment bank in an effort to minimize any fallout that might be inflicted on the broader financial system and the overall economy. Such procedures, which are in place for commercial banks, might have made the dissolution of investment firm Bear Stearns more orderly.

"In light of the Bear Stearns episode, Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools," Bernanke said.

Paulson, who recently laid out such a proposal, said: "It is clear that some institutions, if they fail, can have a systemic impact." However, financial players need to be disciplined in managing risk and not expect the government to fly to their rescue, he added. "For market discipline to effectively constrain risk, financial institutions must be allowed to fail," he said.

This is incredible. So, the government should be able to bail out "some institutions", yet financial players should "not expect the government to fly to their rescue." Yeah, that will work real well. As long as the institutions don't expect the bailout, it's fine. Do these guys have any trust or understanding of the market? If the market relies this much on a few institutions, then it must change. Monopolies are not created without help from the government, and this is a perfect example why. If a few elite "institutions" get top priority and the government will not let them fail, it is essentially creating a monopoly. These guys are saying that the market and economy will suffer if one of the banking institutions fail, so they plan on further empowering those companies by giving the government power to "insulate the economy" and bail these big guns out with taxpayer dollars? This is beyond ridiculous.

Mainstream economics have become greatly skewed and are getting pitifully far from true free market principles where people make their own decisions. The Federal Reserve was created to bring in a new age of business and create financial stability, neither of which (in my opinion) have turned out to be the case. While Bernanke, Paulson, and the Fed may have good intentions, these moves will only add to the long-term instability of the economy. Short-term it may stop a harsh correction or recession from coming about (both of which have been greatly delayed largely due to the Fed), but long-term it will only add reliance to these financial institutions which they already claim are too important to let fail. If this is the case, we must lessen that reliance, not increase it. And the only true way of lessening reliance over the long run is through the market. The government doesn't know how to solve this, the Fed doesn't know how to solve this, only the market. Sure, in the short-term there may be things to lessen the pain of whatever may come about, but for true long-term stability it is the forces of the market which must be put to work. Delaying a recession or correction does not get rid of it but only increases the chances of a harsher one coming about sometime down the road.

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