Federal Reserve Acts Instead of Congress

The House defeated the Market Stabilization Bill, much to the applause of many, on Monday. Many people who I tend to agree with hailed this as progress. I take a slightly different view. First, though there were flaws with the original bill, the one that Congress voted down was actually a pretty sweet deal for the taxpayers, as it all but assured a profit, along with reforms. In addition, the money would have been slowly portioned out with a lot of conditions. Still, a lot of people said well, we saved $700 billion and didn't bail out a bunch of people who were the cause of the situation. Well, the conditions on the money were so stringent, I'm not even sure many firms would have bit, as the bill imposes brutal conditions on them. In fact, the term bailout is simply incorrect. While there have been bailouts in the past, this was not one. This was a bitter pill that would only have been taken to avoid death. However, none of this is really relevant.

That's because, since Congress didn't act, the Federal reserve did instead. Some of my beloved fellow econ-nerds will point out that the mechanism is different, but I would argue it is not different enough to quibble over. They loaned out $630 billion, about 2.5 times as much as would have been available immediately under the house bill. In addition, while there will be some minimal interest paid, there will not be the profit potential of the house bill. There will also not be any of the reforms proposed, nor limits on executive compensation that some cared so deeply about. The Dow fell almost 800 points on the news, hardly helpful, especially to consumer confidence. Also, this is a more inflationary move than the House bill, yet will not directly help the CDS and CDO situation. Basically this move has all the problems with the legislation, but none of the benefits. Careful what you wish for.

This entire crisis has caused me to re-evaluate my stand on the Federal Reserve. I used to believe it was critical to economic growth. I am no longer so sure. Those that predicted this, such as Mr. Ron Paul, will carry more weight with me in the future on this matter. Moreover, in the big picture, the Fed essentially overruled Congress. The bill was defeated, and the Fed went against certainly the spirit of that vote. There are many cries for more regulation of Wall Street. Maybe there should be cries for more regulation of the Fed. Or maybe a conversation about weather it should exist, and if so, in what form.