Okay class, here is your bonus question...true or false:
Even if Congress were to do nothing at all in response to Paulson's/Bernanke's/Bush's request, isn't it true that The Fed would simply seize the initiative and prevent the collapse all by itself?
The answer is yes.
While listening to Bernanke at the hearings earlier, it hit me all of a sudden. The answer to the question, "What will happen if the Taxpayer Bailout is not approved by Congress?" is that the Federal Reserve will bail the financial industry out because it can.
Contrary to what most people think, the Federal Reserve is not a government entity. It does not receive any taxpayer funding for its operations because it is an entity that is owned by the commercial banking industry. Fed Chief Bernanke is appointed to his position by the President, but just about everyone else working for the Fed is an employee of the commercial banking industry.
Is there really any chance that the commercial banking industry is not going to use its 'arm' (the Fed) to bail itself out? Is The Fed not the lender of last resort? If Bernanke and his cohort had been convinced that a Taxpayer Bailout was not even a remote possibility, what do you suppose he/they would end up doing about Washington Mutual (the big bank that is expected to fail in the coming days weeks, that the bailout is supposed to help)?
Nothing at all? Wring their hands while watching the whole financial sector melt down?
The answer: of course not.
Ben has already shown us what the Fed can do, if it wants, when the Fed bought an equity interest in AIG. This is something that it could and would do an unlimited number of times if that was what it thought was necessary to prevent a financial industry meltdown. If the Fed wants, it can buy any amount of debt [or even equity] instruments that it wants in order to avoid disaster.
It can do this with money that it creates out of thin air with a keystroke. It does this all the time whenever it conducts Open Market Operations. (That's when the Fed buys Treasury bonds to increase the money supply.) There is no fund of limited size that it must tap in order to buy paper assets. If Congress does nothing whatsoever in response the the Paulson/Bernanke request, the Fed would simply go ahead and intervene, all by itself.
So the question we all need to start asking ourselves is why have we been hearing all this scary talk about how crucial it is for Congress to take URGENT ACTION? It seems quite apparent to me that it was done to give the Financial Sector (=Republicans) political leverage.
I suspect that an opportunity was seen---when it became apparent that Lehman Bros., Merrill Lynch, and AIG were in trouble---to use the startling news of the Fed's interventions to create a perception in Congress that a Taxpayer Bailout was absolutely necessary in order for Congress to save the nation from Financial Doom. (Weren't they just a little too eager to sound the alarm bell? I mean, for guys who are usually so concerned about statements that could incite panic?)
Why would the Fed be willing to go along with this stunt?
A Taxpayer Bailout is the preferred solution since it would spare the Fed a great deal of scrutiny; scrutiny that it would otherwise undergo if it were to continue to buy up the equity of private companies. The Fed wants to continue to keep itself out of the spotlight; if it can get Congress to take on responsibility for the mess, all the better for them, and the banking industry as a whole, and the Republican Party as a brand.
So this is all a political stunt, folks. Democrats need do nothing more than position themselves politically in these weeks leading up to election day while taking their time to put together a REAL SOLUTION to the problem.
Did you get the right answer?