Messing with the Global Financial Gene Pool

The report by the Federal Reserve dropped a $3.3 trillion dollar bombshell on the American public has global implications felt around the world. Some have even gone so far as to call the Fed the “bank of the world.” Loaning money to failing American institutions is a regrettable invasion into a free market, which argues for the removal of government affairs into business almost like the separation of church and state.  But what does it mean when the Fed oversteps country lines and begins lending to foreign companies? The Fed report reinforces on very important fact. We have lost control of this government agency as it move further and further into the business of becoming a world bank with the forced investment of American taxpayers.

But isn’t the Fed already a central bank? I criticized the Fed earlier because or their lack of transparency but I remain torn on their role in the market. The Fed is such a mega power it is hard to really define where they fall in the free market. On some level, they are a safety net that both encourages risk and eases some of the aftermath but at what cost. Yes, they are a bank but unlike a private bank they control how much the dollar is worth and they cannot actually fail. But it would be hard to argue the federal government has the ability or desire to exercise much power over the bank, making it if not private, at least somewhat immune to party influence and daily politics.

In his column “Lessons in a $3,300bn surprise from the Fed,” posted (here) on the FinancialTimes.com, Gillian Tett raises several interesting points worth thinking about. He writes, “The crucial issue in the recent financial crisis was the fact that the murky shadow banking world froze up. What the Fed was in essence doing…was replacing the securitization market, and providing liquidity to the system; in a sense, the Fed became the market in 2008 and 2009, not just in the US but parts of Europe too.” He goes on to suggest the Fed was right in doing this, suggesting the severity of the crisis warranted such extensive action. He argued the Fed has strong powers the European Central Bank lacks.

However, support for the Fed’s actions is by no means universal. In her blog, appearing (here) on the HuffingtonPost.com, Mary Bottari of the Center for Media and Democracy and www.BanksterUSA.org, takes a more critical approach to the Fed’s actions.  She attacked the Fed’s use on hyper-lower short-term loans to foreign institutions, saying she would like such a rate on her credit card.  She argues that an investigation into the matter might reveal that all of these loans were given out to foreign bank crucial to U.S. banks, echoing criticisms that the system has become too interconnected.

So is it the Fed’s role to become the market in times of great financial distress? I suppose the bottom line is really whether or not taxpayers see these loans repaid and the burden does not fall on our own growing budget deficit. Then it may not fundamentally matter. However, the fact remains that the Fed has morphed from a central bank into a synthetic free market agent, a manipulator of the genetic makeup of the market. Hopefully, they are not a virus.