Hold on a second... the US federal reserve bank is... PRIVATE?

[Avinash_Tyagi]

albionus said:

Avinash_Tyagi said:
The fed is fine as it is, however the recent actions by the fed, as a bailout to the big investors and banks is troubling, since the best way to change people's habits is to let them get burned for their bad investements, but by bailing these jokers out after they created this downturn with the subprimes, they only give them an incentive to continue to make the same stupid investments, so the only issue I would have with the fed is the fact that the people running the show at the moment lack the guts to do their job properly. Too big to let fail, my foot, let them burn I say.

Moral hazard defined.  The problem is human nature of course.  If the Fed and politicians didn't bailout big investors it would cause short term pain (in exchange for a better longterm situation) but elections and firings happen in the shortterm.  Better to bailout now, save your job, and hope that when bigger problems come longer term you'll either be gone or can find someone else to blame.  Although in this case I'm not sure if the bailouts will cause more problems than they help.  Avoiding the deleterious impact that allowing major American banks to go under would have on an international financial system that is concerned about the stability of its biggest member may make the bailouts worthwhile.  I haven't really read up on the situation enough to have an informed opinion though.

The Wall Street Journal print edition had a great editorial a month ago or so about how the same phenomenon is hurting corporations, ie no one wants to fix long term problems because the short term pain would place their job at greater risk now than the long term problem would later.  It's popular to blame the Fed for the housing bubble but why were banks giving mortgages to people without doing credit and income checks?  Because if the loan officers and managers didn't match their competitors loan growth rates they would have been fired or at the least lost bonuses. 

 Yeah but the problem I have with the bailouts is while it may hurt in the short run to let these banks face the problem on thier own, because its unlikely they'll become insolvent, just undercapitalized, and that will force them to cutback at most, or look for outside investment, like with Abu Dhabi and citigroup, however none of the bailouts help out small investors who got burned, nor do they rectify the damage done to the consumer by the housing bubble a bubble helped along by the subprime loans issuing and the loss of equity they had in their homes, most Americans don't have the savings to make up that shortfall, instead most have large debt, this will likely cause a contraction in consumer spending, so its not like the economy will not suffer as a result of this.  

 Not only that but I question whether now is the best time to allow this, since while the debt right now is not enough to drag the economy, the fact that the past eight years have been spent twiddling thumbs instead of dealing with the looming entitlement problem and the likely drop in the stock market when the Baby boomers retire, and cash out their retirement funds, I wonder whether putting off the pain until later isn't a very bad decision, since the last thing we will need at that point is to have more economic problems to deal with when that happens.  Letting the pain happen now might help to push us in the direction of fixing these other problems before they do become a drag on the economy.