Comments on: Former Fed Staffer Savages Bear Rescue

By: Dave Raithel

Dave Raithel — Fri, 02 May 2008 13:28:00 +0000

Pardon me that this is late, but The May 2nd NY Times, in an article by Floyd Norris, states that Minksy’s book referenced by “av” has been re-printed by McGraw-Hill. (The context is the Bush admin’s Under-secretary of the Treasury, Robert K. Steel, citing Minksy to explain why they do what they do – apparently, we are all Keynesians again ….)

By: av

av — Wed, 30 Apr 2008 11:00:00 +0000

A lot of people think that the Fed’s actions in the recent crisis – whether acting as defacto ‘market maker of last resort’ and accepting a wider range of securities; or its role in the merger of BSC – is unprecendented.

But this is far from true. The Fed’s actions are well in line with what it has done in the past. The key book here really is Hyman Minsky’s ‘Stabilizing an Unstable Economy’ (which i believe has just come back into print). He describes in detail the Fed’s actions in bailing out REITs in the 1970s and before that, the way it handled the the financial crisis of 1966. A few other crises, in the late 70s and early 80s, are also looked at. In almost every case, the Fed widened the range of securities it would accept at the discount window, and took other steps which now sound more than vaguely familiar.

Minsky then goes on to talk about the moral hazard problems and the fact these actions of the Fed during each crisis, sowed the seeds of future problems. The book (published in the mid 1980s) is truly worth reading for a sense of how Fed policy towards crises has followed a time -tested pattern.

By: atauber

atauber — Tue, 29 Apr 2008 14:10:00 +0000

maybe im wrong but it seems that the FED retracted because they took revenge on BSC FOR NOT HELPING THEM IN 1998 in the LTCM bailout.

By: Richard Kline

Richard Kline — Tue, 29 Apr 2008 12:39:00 +0000

To the extent that the demise of Bear Stearns can be reconstructed at this junction, it is my view that it was the private refusal of the other ibanks and major financials on Thursday, 13 Mar into Friday, 14 Mar to continue routine counterparty transactions that put BSC into full out thrash mode. The downgrade of Friday only just put the seal of disapproval on the twitching corpse. Bear didn’t jump from that skyscraper window, it was the impetus of half a dozen knives in its back that sent it over into eternity. Yes, there were many and various things the Fed could do to _fund_ Bear going forward—if the other major financials would resume counterparty actions with Bear. Which they steadfastly refused to do so far as can be told, playing chicken with the potential for a ‘derivatives event’ on Monday, 17 Mar if the powers that be didn’t see it their way. Attempts to reflate Bear if the other ibanks wouldn’t play would have been useless, just a way to lose money at once rather than gradually maybe. And since the Fed didn’t and doesn’t regulate the other ibanks, it couldn’t very well force them to open their swap windows. This was greenmail.

And as we see, it worked beautifully. Bear was left to expire. The Fed got jobbed. The other ibanks got all of _their_ existing counterparty exposure to BSC covered at par. And they all got access to the TSLF, minus a competitor. To me, this may be what got under Reinhart’s skin: the other ibanks put a ring in the appendage of the Powers That Be, who now dance to their tune. The Fed has lost all _autonomy_ of action, has handed its full faith and credit over to the speculators in effect. Oh sure, the Fed has never been wholly autonomous of the major money center financials, but now the thieves are running the board meeting for the time being. That’s not just a bad precedent, it’s a terrible and terribly corrupt process.

Does the public know, or much care?? Nahh, they’re to busy betting nickels on the winner of Electoral Idol. Whose contestants are scrupulously silent about all this.