Fed’s Rescue of Bear Stearns “Worst Policy Mistake in a Generation”
April 29th, 2008I’d love to know what would have unwound if Bear had been left to die… Maybe, a better question is: What wouldn’t have unwound?
Via: Wall Street Journal:
The Federal Reserve’s rescue of Bear Stearns Cos. will come to be seen as its “worst policy mistake in a generation,” a former top Fed staffer said.
The episode will be seen as comparable to “the great contraction” of the 1930s and “the great inflation” of the 1970s, Vincent Reinhart said Monday at a panel organized by the American Enterprise Institute, a conservative-leaning think tank where he is now a scholar. Until mid-2007, Mr. Reinhart was director of monetary affairs at the Fed and secretary of its policy-making panel, the most senior position on the Fed’s Washington-based staff.
His appraisal is one of the harshest yet by a high-profile observer. The Fed last month lent Bear Stearns money to prevent a bankruptcy filing and then financed $29 billion of its assets to facilitate a takeover by J.P. Morgan Chase & Co. Former Fed Chairman Paul Volcker has said the move went to “the very edge of [the Fed’s] lawful and implied powers,” although he has since said that that wasn’t meant as a criticism. Congress and analysts have deferred to the Fed’s judgment.
Mr. Reinhart said the bailout “eliminated forever the possibility the Fed could serve as an honest broker.” In 1998, the Fed coaxed private creditors of Long-Term Capital Management to bail out the hedge fund but didn’t have to put up its own money. If it ever tries a similar maneuver on a Wall Street cohort, he said, “The reasonable question any person in the room will ask is, ‘How much will you contribute to the solution?'”
Mr. Reinhart said the Fed’s move may have been justified if the alternative was a chain-reaction run on many other investment banks. But he asked if other options were available, such as taking a “tougher line” with J.P. Morgan, seeking other suitors, removing certain assets from Bear’s portfolio or quickly implementing its previously announced offer to temporarily swap Treasury securities for dealers’ less liquid assets. “All those things were possible but not pursued,” he said.
