By Joseph
N. DiStefano
Inquirer
Staff Writer
August 24, 2008
Anyone who's still under
the Greenspan-era Wall Street
illusion that the Federal Reserve runs this country should look at what
happened when Fed Chairman Ben Bernanke tried to brush off a Pennsylvania congressman earlier this year.
On March 17, U.S. Rep. Paul
E. Kanjorski, backed by members
of both parties, sent Bernanke a letter asking him to bail out student lenders,
and to let the Fed accept student loans as collateral for Fed financing, as it
did with home loans.
Kanjorksi figured: If the
Fed could take special steps to keep Bear Stearns & Co. and its damaged
home-loan bonds from blowing up all over Wall Street, why not help the
Pennsylvania Higher Education Assistance Agency and other troubled lenders keep
kids in school?
On March 31, Bernanke said
no. Bailing out student lenders "that do not pose a significant risk of
systemic financial crisis" would contradict Congress' own priorities from
earlier times, he wrote.
Blocked, Kanjorski did an end run around the
Fed. The congressman from Nanticoke
heads the influential House Financial Services subcommittee. In just a month,
he and his colleagues passed a law setting up a new student loan financing
authority - across town in the Department of Education.
On May 2, just before Kanjorski's bill passed, Bernanke
bent, allowing the Fed to accept student loans as collateral alongside home
loans.
"The regulators
realized we were going to move, and that they'd get embarrassed, and they
decided they'd better change their positions," Kanjorski told me. "It was a proud moment."
Kanjorski's approach raises big questions:
Who's really in charge of financial policy? Is the Fed really independent, if
Congress can push it aside to help constituents? Should it be?
Philadelphia Fed President
Charles I. Plosser has warned that radical acts like the Bear Stearns rescue,
which go beyond the agency's old mission as traffic cop for business and
consumer lenders, demand careful, long-term policies that encourage prudent
lending and discourage dangerous loans like the ones defaulting in Las Vegas,
Florida and California, jamming financial markets around the world.
On Friday, Bernanke asked
Congress for "a clear [legal] framework" granting new powers that
would strengthen the Fed's powers over banks and non-bank financial companies.
It's a plea for long-term
thinking and permanent rules. "Sometimes what we intend to be stopgap
turns out permanent," acknowledged Kanjorski.
But he's not apologizing
for Congress' firefighting approach: "We're interested in stabilizing the
market. That means stabilizing real estate prices, and going where the free
flow of capital funds has failed to develop substitute methodologies. Then,
when we get the entire system working again, over the next 12 months, we're
going to go into a very thorough examination of how we got there and what has
to be changed. We're not anywhere near that right now."
It used to be, Kanjorski added, that policymakers
worried some banks "were too big to fail. Now, it's 'are they too
interconnected to fail?'"
That was Bear Stearns'
danger: Not that traders and bankers would lose their jobs, but that
loan-backed securities held by Bear would lose all value, bankrupting the
company's bank and government clients. "They were small enough to fail,
but they had $12 trillion [in securities bets with clients]," Kanjorski said. "Nobody knew what
would happen if that started to unravel. That's a whole new concept."
"It's important for
Congress to draw lines, rather than dealing with this on an ad hoc basis. It
will be really interesting to see if the Fed accepts that notion," said
Fed watcher Tom Schlesinger, of the Financial
Markets Center,
which has criticized the Fed for making policy in secret.
Schlesinger said Congress
became deferential to the Fed during the bull-market 1990s. "But the Fed
is a creature of Congress," he added. "Congress has always had the
authority to step in and provide guarantees or bailouts for sectors it deems
crucial. That's the key to what Kanjorski
was getting at.
"Once the dust
settles, there is going to be some new understanding of the law that guides the
Federal Reserve."
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