Sunday, March 23, 2008

Spectre of Depression haunts Federal Reserve

"The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system." - Federal Reserve Board of Governors website.
The Fed has allowed and in fact funded, through cheap credit, the current crisis. Marx demonstrates that capital crises are inevitable, however, it seems quite clear that the credit monopoly grated to the Fed (a group of 12 private corporations backed by US tax-payers through Treasury Bills) is the perfect mechanism to accelerate and magnify the scope of financial crises.
Over the past week, the Federal Reserve under Ben Bernanke has taken a much more aggressive approach to the ongoing credit crisis. It combined providing $30bn (£15.1bn) to help JP Morgan pick up the remnants of Bear Sterns with widening the collateral pool it will accept, extending the period at which it is prepared to lend this new money, and narrowing the discount spread, with a 75 basis point rate-cut cherry on top.

As if that were not enough, the Office of Federal Housing Enterprise Oversight (OFHEO) announced a cut in the surplus capital requirement for the two government-sponsored bodies which back mortgages, known as Fannie Mae and Freddie Mac. They say this will immediately inject up to $200bn of liquidity to the mortgage-backed securities market, as part of a combined package that could allow them to purchase or guarantee about $2 trillion in mortgages this year.

This falls just short of throwing the proverbial kitchen sink at the problem. The question is, will it work? The symbolism of using a facility developed during the Great Depression, during which the original JP Morgan made his name by buying up great swaths of the New York stock market, will have been lost on no one.

Gabay, Danny. 23-Mar-2008. Spectre of Depression haunts Federal Reserve. Telegraph.
The Fed was created, avowedly, to prevent financial crises. Within 20 years of its creation, the United States led the world into the Great Depression. There have been many recessions since then, and today we may be seeing a repeat of conditions eerily similar to those which led to the Depression. So the question is whether the Fed lives up to its stated goals or whether, considering its dismal track record and lack of public accountability, it actually has a different mission.

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