James rickards writer economist lawyer and investment

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James Rickards (writer, economist, lawyer and investment adviser), Financial Times , August 12, 2010 The financial crisis that started in the second half of 2007 highlighted the extraordinary power of the Federal Reserve (Fed) to intervene in the economy in a crisis. The title of the book by David Wessel, In Fed We Trust: Ben Bernanke’s War on the Great Panic , sums it all up. Wherever there was a fire, the Fed used all its might to extinguish it. It also gave ammunition to those around the fire to defend themselves. In essence, the Fed played with flourish its role as the lender of last resort (LOLR) – lending to the financial sector (and even markets at large) when no one else would, so as to ensure the financial sector’s stability. The Fed pumped liquidity into the system with creativity and expedience seen never before from any other central bank. Macroeconomists who had long focused on the Fed’s role of determining interest rates to ensure price stability and full employment found the Fed’s methods “unconventional”. But to economic historians, what the Fed attempted to do in this crisis was not that unconventional. 39 For example, in the panic of 1907, John Pierpont Morgan was asked to play the role of distributing Treasury’s liquidity injection to the defaulting trust companies. This panic and the LOLR function played by Morgan were the origin of the Federal Reserve. But the absence of major financial crises in the United States since the Banking Act of 1933 placed this function in the background. The Fed’s sole purpose was perceived to be price stability and full employment. There was, however, something unconventional about the Fed’s LOLR activities in the current crisis: Because of a lack of adequate authority and infrastructure for resolving the distress of government-sponsored enterprises (GSEs) and large and complex financial institutions, there seemed to be no tool at work other than the Fed’s liquidity injections to get a handle on the crisis.
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76 As David Wessel warns in his book, however, the Fed’s war on the great panic is far from over. The Fed has still to mop up the liquidity that it has sprinkled all around. The popular view is that the most important excursions of the Fed were in dealing with the failures of Bear Stearns and AIG. Contrary to this view, we will explain in this chapter that the Fed’s biggest role in the crisis has been in dealing with the mortgage mess that was left by the collapse of Fannie Mae and the Freddie Mac. In fact, since the start of their conservatorships in September 2008, these GSEs have been operating similarly to what a “bad bank” typically looks like at the end of a financial crisis. By buying more than $1.4 trillion worth of GSE debt and GSE-backed securities, the Fed has propped up the value of these bad banks’ securities and the housing market more generally.
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