Fed Chairman Ben Bernanke made his boldest move to date overturning a 94-year Fed history of only funding commercial banks. Over the weekend the Fed announced it would become the lender of last resort for the biggest dealers in U.S. government bonds. That's huge! As part of the deal to get rid of the "Bear Stearns problem," the Fed also agreed to help J.P. Morgan Chase (NYSE: JPM) buy Bear Stearns (NYSE: BSC) by offering $30 billion to help finance the purchase. Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed, told Bloomberg, "It is a serious extension of putting the Federal Reserve's balance sheet in harm's way. That's got to tell you the economy is in a pretty precarious state."
Looks like Bernanke's years of studying the Great Depression may actually help us avoid another run on the banks and another Great Depression. When investors realize that the Fed is ready and willing to step in, that should calm the markets.
Hopefully he didn't sit on the sidelines too long though. Gary Schlossberg, senior economist at Wells Capital Management told Bloomberg: "Clearly, the Fed is trying to provide more liquidity to prevent a more vicious cycle and race to the bottom. The problem is there's so much concern about credit quality that now there are solvency issues, and it's something the Fed has a more difficult time dealing with."
No doubt the Fed is facing a much more difficult fix because it didn't jump into the fray sooner, but this bold move hopefully will send the signals investors needed and prevent a similar run on other investment banks.
Lita Epstein has written more than 20 books including the "Complete Idiot's Guide to the Federal Reserve."
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