Federal Reserve

The Federal Reserve faces a big dilemma late this year and next year: How long can the Fed wait to raise rates and to cut back this liquidity injection? The Fed remains quite concerned about inflation; however, it has a more immediate priority -- to keep the financial system from seizing up.

On Sunday, March 16, the Federal Reserve crossed a big line directly bailing out a non-depository financial institution and our fifth largest investment bank, Bear Stearns, for the first time since the Depression. The Fed forced Bear Stearns out of existence by loaning J.P.Morgan Chase $30 b. to purchase it at a fire sale price of $236 million on Sunday after Bear Stearns stock closed with a market valuation of $3.5 b. on Friday, March 14th.

The transaction raises a lot of questions. The ones I would like to deal with are: Why didn't the Fed just let Bear Stearns go bankrupt? How big a windfall was this for J.P.Morgan Chase? What risks does this Fed action pose for the future?

We don't know why the Fed took this action. Their press release announced the action in one sentence without any explanation.

I'm just starting to understand why The Daily Show is the most-watched "news" program for college students (and, I hear, Wall Street analysts).

In a front page story in today's Washington Post about Alan Greenspan's about-to-be-published book, "The Age of Turbulence: Adventures in a New World," Bob Woodward says that Greenspan lashes out at George W. Bush, the Bush administration, and congressional Republicans for terrible economic stewardship.