Scoping out the Fed's Next Move

This morning on The Opening Bell I interviewed Former Fed Governor and Director of Princeton’s Center for Economic Policy Studies, Alan Blinder. Take a look at the video below and the op-ed piece he wrote in this morning’s Washington Post. 

On the show he told me that until last summer, most people hadn’t even heard of a subprime mortgage. “On a trend, it’s getting worse, not better, here we are into March and its enveloping all kinds of financial markets, even including the dollar. That kind of track suggests to me, and obviously suggests to the Fed also, that pretty decisive actions are needed on a broad front.”  

He also said the Treasury Secretary Henry Paulson needs to play a more active role in easing the financial turmoil. “Whoever occupies that job is the chief financial officer of the United States, he is also a political appointee who can and does speak for the president so I think leadership really ought come from the top.,” he said.  “When it comes from putting taxpayer money on the line, whether they are actually spending it or putting it at risk which the Fed has now started to do, it really ought to be the Treasury, the administration or Congress that are doing this rather than the Federal Reserve.”

The Fed Can't Do It Alone
By Alan S. Blinder - Tuesday, March 18, 2008; A19 The Washington Post

Psychology has now overwhelmed economics. What started last summer as a serious problem in a little-known -- but not so little -- corner of the U.S. mortgage market has blossomed into a worldwide financial panic, the sort we read about in history books. Except within the Republican Party, laissez-fairy tales have been discarded, and government support is being both sought and given.

The financial markets live or die on confidence. If you sell a security, you must believe the other guy will pay. You must also believe that something worth $30 at Friday's close, such as shares of Bear Stearns, will not be worth $2 at Monday's open. Such confidence looks to be draining from the system.

Who can restore it? Once upon a time, it was J.P. Morgan -- the man, not the company. Today, it must be the world's leading central banks and treasuries, starting with our own.

Unfortunately, this past weekend was a bad one for Team USA. On Friday, President Bush gave a speech at the Economic Club of New York that left people wondering whether he was in touch. On Sunday, Treasury Secretary Henry Paulson, who has been eerily silent as this crisis unfolded, made the rounds of the morning talk shows. It was not reassuring to see this former titan of Wall Street recite his talking points. Wolf Blitzer asked him five times, "Why did you bail out Bear Stearns?" He never got an answer.

Actually, the Treasury didn't bail out Bear Stearns; the Federal Reserve did. Chairman Ben Bernanke and the Fed have been working overtime; they have slashed interest rates and lent or offered money to almost everyone potentially involved in this mess. On Sunday, the Fed even put its own balance sheet at risk to smooth the way for J.P. Morgan (the company, not the man) to "buy" Bear Stearns. But the stunningly low purchase price, far below even the value of Bear Stearns's Manhattan building, did not exactly inspire confidence.

Earth to the White House and Congress: The Fed cannot do this job alone.

But isn't the central bank the fabled "lender of last resort"? Yes, and the Fed is performing that role extensively. But central banks are designed to lend money to banks that are illiquid but not insolvent. It is not supposed to spend taxpayer money or even put much of it at risk. Those political decisions are properly made by elected leaders.

So what can be done now?

Click here to read the rest of the article from the Washington Post