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US Treasury and the Fed: too close for comfort?

Some economists have reservations about recent moves to rescue the economy.

By David R. Francis / December 1, 2008

Economic historians must see the actions of today's Federal Reserve as strange.

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"Very, very unusual," says Allen Sinai, chief economist of Decision Economics, an economic consulting firm. "Unprecedented … uncharted."

The nation's central bank has joined with the United States 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, Mr. Bernanke's research centered on that economically desperate era of the 1930s.

Last Tuesday, for example, the Fed and the Treasury announced $800 billion in new lending programs 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, N.Y. "A home run."

He sees the action as needed to deal with the major drop in housing prices that is behind the economic crisis in large degree.

As Mr. 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 was the huge multibillion dollar boost given Citigroup last Monday.