I didn’t post this article at first, because I thought the financial press was making a much bigger deal out of what seemed, to me, a fairly tepid critique of Bernanke’s actions.
April 8 (Bloomberg) — Former Federal Reserve Chairman Paul Volcker questioned the central bank’s decision to rescue Bear Stearns Cos. with a $29 billion loan, saying it was at “the very edge” of its legal authority.
“The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,” Volcker said in a speech to the Economic Club of New York.
Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival. Bernanke, who worked with Treasury Secretary Henry Paulson to broker the bailout, last week defended the move as necessary to prevent “severe” damage to financial markets.
Volcker, the Fed chairman from 1979 to 1987, had implicit criticism for U.S. regulators and market participants who allowed “excesses of subprime mortgages” to spread into “the mother of all crises.” The Fed’s Bear Stearns loan was unusual, he said.
“What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return,” he said. …
The first three times I read that last sentence, it sounded like this in my head:
“… test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral [and] test [lending freely at high rates against good collateral] to the point of no return” (as in, lend at high rates against good collateral until/unless something bad happens). Which seemed oddly dovish coming from Volcker.
However, I’m pretty sure that’s not what Volcker meant, but rather, “… test the time-honored central bank mantra in time of crisis — lend freely at high rates against good collateral — test [the mantra of good collateral] to the point of no return.” (As in, “no return” to the present Fed system.)
Maybe I’m just slowing down with age, and this was more obvious to others who read the article. But it makes more sense now, and comes across as a much more pointed critique of Bernanke.
Market-participant herd psychology baffles me. I guess every community suffers from echo-chamber effects sometimes, but it’s just strange how normally intelligent, independent, ahead-of-the-curve finance people such as Dick Bove, GaveKal, and so on, completely abandon their convictions and common sense during times of stress, and find any number of rationalizations for why perpetuating a bailout culture is “brilliant.”
So Volcker’s words are all the more valuable, in my book.