Is The Fed Giving Wall Street A Free Ride?

Booms and busts are inevitable in a capitalist system. Right now, the Federal Reserve and, belatedly, the U.S. Treasury, are out to avoid facing the terrifying prospect that the credit crunch currently bedeviling Wall Street could morph into a sharp and sickening economic downturn--or even a full-fledged depression.

Think about what the Fed has done in recent months: cut its benchmark interest rate by 3 percentage points (including a 75-basis-point easing on Mar. 18), injected massive amounts of liquidity into the financial system, set up an alphabet soup of funding mechanisms for big U.S. banks (a Term Auction Facility, or TAF; a Term Security Lending Facility, or TSLF; and a Primary Dealer Credit Facility, or PDCF), and wielded extraordinary powers to engineer the rescue of investment bank Bear Stearns (BSC).

The Fed's unusual burst of activity has a clear, specific purpose. In the jargon of Wall Street rocket scientists, the Fed wants to avoid a "fat tail" catastrophe event or "regime shift." In simpler, terms, it's trying to stop a financial-system meltdown. The Fed's urgent efforts to shore up the financial system are understandable, when depression fears have shifted from society's "crackpot fringe" to the power centers of Washington and New York. For Ben Bernanke & Co., there was no real alternative.

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