Bailing
Out Banks
By Congressman Ron Paul
There has been a lot
of talk in the news recently about the Federal Reserve and the actions it has
taken over the past few months. Many media pundits have been bending over
backwards to praise the Fed for supposedly restoring stability to the market.
This interpretation of the Fed's actions couldn't be further from the truth.
The current market
crisis began because of Federal Reserve monetary policy during the early 2000s
in which the Fed lowered the interest rate to a below-market rate. The
artificially low rates led to overinvestment in housing and other
malinvestments. When the first indications of market trouble began back in
August of 2007, instead of holding back and allowing bad decision-makers to
suffer the consequences of their actions, the Federal Reserve took aggressive,
inflationary action to ensure that large Wall Street firms would not lose money.
It began by lowering the discount rates, the rates of interest charged to banks
who borrow directly from the Fed, and lengthening the terms of such loans. This
eliminated much of the stigma from discount window borrowing and enabled
troubled banks to come to the Fed directly for funding, pay only a slightly
higher interest rate but also secure these loans for a period longer than just
overnight.
After the massive
increase in discount window lending proved to be ineffective, the Fed became
more and more creative with its funding arrangements. It has since created the
Term Auction Facility (TAF), the Primary Dealer Credit Facility (PDCF), and the
Term Securities Lending Facility (TSLF). The upshot of all of these new programs
is that through auctions of securities or through deposits of collateral, the
Fed is pushing hundreds of billions of dollars of funding into the financial
system in a misguided attempt to shore up the stability of the system.
The PDCF in
particular is a departure from the established pattern of Fed intervention
because it targets the primary dealers, the largest investment banks who
purchase government securities directly from the New York Fed. These banks have
never before been allowed to borrow from the Fed, but thanks to the Fed Board of
Governors, these investment banks can now receive loans from the Fed in exchange
for securities which will in all likelihood soon lose much of their value.
The net effect of all
this new funding has been to pump hundreds of billions of dollars into the
financial system and bail out banks whose poor decision making should have
caused them to go out of business. Instead of being forced to learn their
lesson, these poor-performing banks are being rewarded for their financial
mismanagement, and the ultimate cost of this bailout will fall on the American
taxpayers. Already this new money flowing into the system is spurring talk of
the next speculative bubble, possibly this time in commodities.
Worst of all, the
Treasury Department has recently proposed that the Federal Reserve, which was
responsible for the housing bubble and subprime crisis in the first place, be
rewarded for all its intervention by being turned into a super-regulator. The
Treasury foresees the Fed as the guarantor of market stability, with oversight
over any financial institution that could pose a threat to the financial system.
Rewarding poor performing financial institutions is bad enough, but rewarding
the institution that enabled the current economic crisis is unconscionable.
http://www.house.gov/paul/tst/tst2008/tst041308.htm
