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WASHINGTON — Far more than at any time before, the Federal Reserve is putting its vast resources and its reputation on the line to rescue Wall Street’s biggest institutions from their far-reaching mistakes.
. . .
The biggest danger is damage to the Federal Reserve’s credibility if it is seen as unwilling to let financial institutions face the consequences of their decisions. Central banks have long been acutely sensitive to “moral hazard,” the danger that rescuing investors from their mistakes will simply encourage others to be more reckless in the future.
Fed officials for years have cringed at the mention of a “Greenspan put,” an allusion to the belief of some investors that Alan Greenspan, the former Fed chairman, would use the Fed’s powers to protect them against a plunge in financial markets and provide them with a metaphorical “put” — an option to unwind their positions at an acceptable price.
But the moves undertaken by the current chairman, Ben S. Bernanke, amount to a much bigger insurance policy than anything Mr. Greenspan provided.
. . .
“This is really a very ugly situation for the Fed to be in,” Mr. Darda said. “They’re making a calculation about what is the greater evil, and they’ve made a decision that letting the credit crisis exhaust itself is too big a risk.”
-- Edmund L. Andrews for The New York Times
In addition to the "moral hazard" of the long-term concern about the financial institutions' developing sense of being risk-free is the developing threat of inflation. Maybe they know what they are doing, but it looks a little like the beginning of a meltdown, and, God, what pain that could mean down the road.
. . .
The biggest danger is damage to the Federal Reserve’s credibility if it is seen as unwilling to let financial institutions face the consequences of their decisions. Central banks have long been acutely sensitive to “moral hazard,” the danger that rescuing investors from their mistakes will simply encourage others to be more reckless in the future.
Fed officials for years have cringed at the mention of a “Greenspan put,” an allusion to the belief of some investors that Alan Greenspan, the former Fed chairman, would use the Fed’s powers to protect them against a plunge in financial markets and provide them with a metaphorical “put” — an option to unwind their positions at an acceptable price.
But the moves undertaken by the current chairman, Ben S. Bernanke, amount to a much bigger insurance policy than anything Mr. Greenspan provided.
. . .
“This is really a very ugly situation for the Fed to be in,” Mr. Darda said. “They’re making a calculation about what is the greater evil, and they’ve made a decision that letting the credit crisis exhaust itself is too big a risk.”
-- Edmund L. Andrews for The New York Times
In addition to the "moral hazard" of the long-term concern about the financial institutions' developing sense of being risk-free is the developing threat of inflation. Maybe they know what they are doing, but it looks a little like the beginning of a meltdown, and, God, what pain that could mean down the road.
