Mad at the Fed

You should be as mad as hell. All Americans should be outraged. The Federal Reserve after causing the current economic crisis is now using our currency, the lifeblood of our economy, to bailout investment houses that have been grossly irresponsible in their business practices.

Unless you have been at the beach, you are probably aware that over the weekend, the Fed. bailed out Bear Stearns and saved it from bankruptcy. For a long time, Bear had made a fortune on its mortgage-backed securities, but with the subprime crisis many of those investments soured and the bank was in danger of collapse. Its stock plunged by 47 percent on Friday. In the Fed’s bailout, Bear got a 28 day loan financed through JP Morgan. For its part, JP Morgan got to buy Bear for pennies on the dollar, risk-free, because the Fed. is guaranteeing up to $30 billion of the bad loans and assets that got Bear into trouble.

The very crisis that got Bear into trouble, the subprime crisis, is the fault of the Fed. For years, the Fed. has kept interest rates artificially low luring marginal borrowers into the housing market. The member banks of the Fed. gave these borrowers adjustable rate mortgages, in many cases, with no money down and no verification of income. The loans were eventually passed up the line as mortgage backed securities to Wall Street giants like Bear, who saw green and didn’t ask the right questions either. In the meantime, the rates on the mortgages adjusted to levels that the borrowers could no longer afford. Voila, the house of cards that the Fed. built is collapsing.

If that is not bad enough, the Fed. is now attempting to cover its tracks by doling out more dollars and putting its good name behind all of the bad debt, all in the name of maintaining confidence in the financial markets. Since Congress gave the Fed. the power of the printing press many years ago, it can make these promises – not without a devastating cost, of course. At a minimum, that cost comes in the form of a devalued dollar (at an all time low against other major currencies already), increased inflation, a declining stock market and further increases in the price of oil (currently at $111 a barrel due to speculators dumping dollars for commodities).

Bear is the first big institution to fall. Bet your depreciated bottom dollar there will be others. Common sense and the mildly trembling voice of Treasury Secretary Paulson this morning is proof of that. The question is, how far is the Fed willing to go to maintain confidence in the financial markets? The bigger questions are: what about the millions of Americans facing foreclosure? What about the retired folks who are invested in the free-falling stock market? How about the middle and lower classes that are paying higher prices at the pump and using a currency that is worth less and less? In the real world, people that created a mess like the one the Fed has created would be held accountable. Those adversely affected would be awarded reparations. This does not happen in the Fed’s world. It simply gets to print more and more money and hope the crisis goes away. I am as mad as hell about this. Thankfully, I will be away for a week on the sunny beaches of Zanzibar. When the next financial crisis happens this week, I’ll find out about it when I get back.

Kenn Jacobine teaches History and English for the American International School of Lusaka, Zambia