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| The Federal Reserve Chairman Ben Bernanke at the National Community Reinvestment Coalition annual conference on Friday. Pablo Martinez Monsivais/AP |
Bernanke and Paulson: economy's two key crisis managers
The Fed chairman and the Treasury secretary face tough scrutiny as policymakers.
from the March 17, 2008 edition
Page 2 of 3
The choices for Paulson and Bernanke are difficult enough that they will face criticism.
Among the top areas of concern:
Foreclosures. One of the loudest complaints against Paulson and the Bush administration: that they should back more aggressive measures to decrease a surging foreclosure rate.
Home prices may need to decline further for buyer demand to return. But a number of prominent economists now argue that homeowner defaults may cause home prices to overshoot on their way down – in a spiral that would damage consumer spirits and the health of banks.
A number of proposals are on the table, including the use of taxpayer money to buy troubled loans at a discount and then ease the terms for homeowners.
Paulson has urged banks to take such action voluntarily. Bernanke recently put a fine point on that notion, calling for banks to write down loan balances to reflect the reality of today's market prices.
But the response to Paulson's formal efforts has been slow, partly because so many loans aren't owned by banks but by pools of far-flung investors. Meanwhile, free-market conservatives have criticized both men for leaning on lenders.
Institutions. The Bear Stearns collapse hints at the possibility that credit-market turmoil could engulf more financial firms – large and small – this year. Already a number of hedge funds and mortgage companies have failed.
In its move last week, the Bernanke Fed (with the knowledge of Paulson and other officials) is framing the current meaning of "too big to fail." Bear is not among the dozen biggest financial players, but it is sizable and its tentacles do reach into a range of important markets.
Some finance experts say the Fed and other bank regulators – including the Treasury's Office of the Comptroller of the Currency – should be more wary of the "moral hazard" involved in bailouts. By riding to the rescue, policymakers make Wall Street complacent about managing its own risks in the future.
But many analysts agreed with the application of the too-big-to-fail doctrine Friday. In this case, the Fed extended credit
to keep Bear afloat, and urged a rapid buyout of the firm. A sign of the level of distress: The bank J.P. Morgan paid $2 per
share Sunday for a company whose shares had traded in the $50s a few days earlier.
In another emergency move over the weekend, the Fed announced a new way that it will loan money to other Wall Street firms
under pressure, not just banks.
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