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Opinion divided on Federal Reserve's lending programme
The Fed and the Treasury have been playing "Whack-A-Mole" this year, striking at a series of liquidity-related crises.
- By David R. Francis, The Christian Science Monitor
- Published: 00:41 December 2, 2008
Economic historians consider the recent actions of the US Federal Reserve as strange.
"Very, very unusual," says Allen Sinai, chief economist of Decision Economics, an economic consulting firm. "Unprecedented ... uncharted."
The nation's central bank has joined the US Treasury in a host of measures this year, aimed at stopping the economic slump and financial crunch from plunging the economy into a depression. The Fed's bold activism is apparently based on the view of its chairman, Ben Bernanke, that the Great Depression was caused by a credit freeze plus a determination not to let it happen again.
At Princeton University, where he had taught for years, Bernanke's research centred on that economically desperate era of '30s.
Last Tuesday, for example, the Fed and the Treasury announced $800 billion (Dh2.93 trillion) in new lending programmes to help jolt the economy into a more vigorous life. The Fed said it would purchase up to $600 billion in debt issued by or backed by housing-related government-sponsored enterprises, such as Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks. It will also back up as much as $200 billion in securities tied to student loans, car loans, credit-card debt and small-business loans.
A major goal is to lower the interest rate on mortgages and make mortgage money more available.
"Hooray," exults Ed Yardeni, an economic consultant and president of Yardeni Research in Great Neck, New York, "A home run." He sees the action as necessary to deal with the major drop in housing prices that is behind the economic crisis in large degree.
As Yardeni sees it, the Fed and the Treasury have been playing "Whack-A-Mole" this year, striking at a series of liquidity-related crises, as a number of financial institutions faced going bankrupt and Washington came to their rescue with injections of funds and other measures. The latest is the multibillion dollar boost given to Citigroup.
'Active stance'
To Murray Weidenbaum, President Reagan's top economic adviser in 1981 and '82, the new Fed has had to take "a more activist stance than the old Fed," considering the serious economic threat facing the nation.
At the same time, he worries somewhat about the Fed's historic independence from the administration.
To veteran economist Anna Schwartz, however, the Fed's current policy of lowering interest rates and rapidly expanding the nation's liquidity is a mistake. "I would like to see the Fed tighten monetary policy," she said in a phone interview from her office in New York.
Schwartz criticises the Fed's leaders for "handing out money so freely ... squandering their funds" and not giving evidence that they are concerned with their prime responsibility, price stability.
As for the danger of deflation - steadily falling prices - she dismisses that as "ridiculous", considering the massive injection of new money into the economy in recent months.
To economist David Levy, the new measures are essential to offset a dramatic reversal in consumer-debt creation as consumers fear for their financial safety. In 2004, consumers added $1 trillion to their debts, $2.4 trillion over the next two years, and $880 billion in 2007.
"We are increasing public debt to replace private debt that is vanishing," he says. "A capitalist economy cannot run without debt creation."
Neither Levy nor Sinai are optimistic about the economy. It could be the worst recession since the 1930s, says Sinai, but not a depression.
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