by Jeannine Montrose

Created on: March 26, 2008

We need the Unites States' central bank if for no other reason than the stability that it offers to stabilize our economic markets. Since his takeover, the current Chairman has acted as diligently as possible to steer the economy clear of a free-fall recession. The Markets' instability, the housing crisis, bad consumer data, the War on Terror, and myriad other problems create a very grim environment from which to launch a feasible economic recovery. What we have ended up with is the Fed trying to put its finger into every hole that springs up in the Nation's financial dikes.

The Federal Reserve despite its erratic behavior as of late, e.g., the Bear Stearns bailout is the only game in town. This move was made in the face of the Federal Reserve System's statement that in was not in the business of banks or other financial institutions that act in an irresponsible manner. The Fed having no cogent policy, and flying by the seat of its pant-regarding a stable economic policy-is behaving in such a way as to frighten the economy. The Federal Reserve System's auction today of fifty billion dollars worth of short term borrowing for banks is nothing but a harbinger of some very worrisome news on the horizon. In this case, the bids for the fifty billion totaled ninety billion. The usual route for this borrowing is inter-bank lending. With the Fed trying to over-control the economic life of the state, the result must be instability. These twenty-eight day loans were anonymous. These desperate behaviors on the part of the central bank are merely turning up the tempo.

The result will probably not be a controlled recession, but may very well border on a return to stagflation. Keeping the Rate artificially low, without regard to the poor news on the financial front, surely will produce the opposite results of those that are hoped for, mainly to keep the entire economy from slipping into a deeper recession. When the markets and just the average person on the street hear that the Fed has cut the prime rate another three-quarters of a point, they start to wonder who is at the helm of our nation's central bank. Returning to the Bear Stearns situation, with a drop in value from eight billion to one billion dollars in worth, virtually overnight, the Federal Reserve System's fiscal bailout must, in simple economic terms, signal a state of flux that will have both short and long term affects on the perception of stability on Wall St.

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