The Week That Was: Excitement Delivered

S&P +3.2% Dow +3.4% Nas +2.1%

- The expected demise of Bear Stearns took place before the week even started
- The Fed cut the federal funds rate 75 basis points
- The government lowered capital reserve requirements for Fannie Mae and Freddie Mac
- The largest IPO in U.S. history saw V shares gain 46% from their offering price

Each one of these stories would be huge enough to dominate a normal week’s news flow. But the biggest development last week was the way in which the deal for BSC went down.
By lending J.P. Morgan $30 billion, the Federal Reserve set a precedent, assuming the title of lender of last resort for investment banks. This new expanded responsibility of the Fed includes extending use of the discount window to primary dealers, a vehicle previously granted only to regular banks, which are much more regulated than investment firms.

The implications are far-reaching, perhaps more so than can be determined. The move by the Fed opens up its balance sheet to far more risk. And the assumption by a private entity of a role better suited for the federal government begs for more oversight. Bernanke and Co. are in an incredibly tight spot, and they’re to be lauded for their ingenuity and resolve. They’ve been forced into a ‘shoot first, ask questions later’ position. The move appears to have been successful (thus far) at restoring confidence among lenders, which is critical to thawing the credit freeze. But when the ice finally melts and questions do get asked, chief among them will be what role the central bank will play going forward in the increasingly complex global economy of the 21st century.

In this interview (33:57) with Charlie Rose on Tuesday, March 18, former Fed chairman Paul Volker discusses Bear Stearns, the dollar, and the actions of the Federal Reserve.



Post of March 15th