Panic socialism refuted: central banker lambasts Fed, flaws in Bear bailout

Discussion in 'Economics' started by Cutten, Mar 26, 2008.

  1. Cutten


    Former Bank of England monetary policy committee member Willem Buiter explains why the bailout was not justified under any of the main principles of central banking intervention, including the typical "lender of last resort" role that central banks play:

    Several members of ET, and numerous media pundits, have suggested the bailout was necessary for a variety of reasons - mostly counterparty risk or a crisis of confidence spreading among the markets. I therefore thought it would be interesting to show you the informed views of a experienced professional trained economist who actually served with distinction at a real central bank, as opposed to the ignorant gobbledegook that has been spouted by inexperienced poorly educated talking heads in the financial media, let alone the abject economic illiteracy that has prevailed here on ET. Note his key conclusion:

    "While the bail-out of Bear Stearns is still very young, thus far at any rate I have heard not a single convincing argument for why this financial business should be assisted by the Fed, rather than the ball bearings company in Cleveland, Ohio."

    I challenge any of the long-standing or newly converted panic socialists on this board to either justify their continued support of the Bear Stearns bailout by pointing out the flaws in Buiter's argument and refuting them with facts and logic, or to recant their views.
  2. Cutten


    Apart from finding no reason that the bailout was necessary, he also finds multiple significant flaws in the way the bailout was actually handled. In other words, even if a bailout was acceptable, it has been done wrong.

    "I am left with a list of questions:

    1 Why hasn’t the Fed declared “unusual and exigent circumstances” yet, so non-deposit-taking financial and other institutions in need of liquidity (like Bear Stearns) and blessed with eligible collateral can go directly to the discount window?
    2 Why was Bear Stearns offered the Fed lifeline rather than being left to sink or swim on its own?
    3 What were the systemic stability concerns that prompted this intervention to assist a non-deposit-taking institution?
    4 If Bear Stearns was deemed too systemically important to fail, why was it not taken into public ownership, preferably at a zero price?
    5 What are the securities the Fed is, directly or indirectly, accepting as collateral from Bear Stearns?
    6 What is the interest rate charged on the loan?
    7 How are these securities valued?
    8 What is the haircut applied to this valuation?"

    There is only one possible conclusion any rational, unbiased person can draw after reading this article - the Fed panicked, the bailout was totally unnecessary, and even if there were reasons for the bailout, it has been handled in a totally incompetent and irrational manner. For a former central banker to lambast the Fed so comprehensively is almost unprecedented. This raises serious questions about the Bernanke Fed's basic competence.
  3. dewton


    the guys who own and control the fed are the same guys who own and control the big financial institutions!
  4. Daal


    you dont need to be certain bear collapse would lead to severed panic on the repo market and bigger problems. an analogy to selling naked puts would fit this, one can collect premiums in form of less moral hazard all his life, one day the roof falls, a truck roll over his head and he is left wondering what the hell just happened
  5. mokwit


    The Fed has sat there with it's head up its backside and then panicked right from the get go.

    It did nothing for months then panicked with a 50BP rate cut on options expiration day. There is no place for these academic buffoons in the real world. The big problem is that being academics they believe the figures eg if inflation is officially 2% then that is what it must be.
  6. Cutten


  7. mokwit


    I agree there should be a tax payers class action against the Fed.

    Ultimately this is about maintaining the razor thin equity in the banking sector and the fiction that the banks are not technically insolvent.