"Commentary"-Putting the Brakes on Bank Runs
Monday, August 27, 2007SUSIE GHARIB: In tonight's commentary, walking a fine line or the Fed's job now. Here's Justin Fox, business and economics columnist at "Time" magazine.
JUSTIN FOX, BUSINESS & ECONOMICS COLUMNIST, TIME: The Federal Reserve and other central banks around the world, have spent the past few weeks combating the modern equivalent of an old-fashioned bank run. Bank runs happened when depositors got worried and wanted their money back. If it was a few, no problem. If it was a lot, an otherwise perfectly solvent bank could go belly up in hours.
The same dynamic has been at work in the huge global market for mortgage securities and other asset-backed debt. Investors who for years had been willing to buy whatever strange new concoctions Wall Street dreamed up have suddenly turned suspicious. They're right to be suspicious, but if every investor around the world who owns mortgage securities decides he'd rather have cash, the whole system goes bust. When just such a thing seemed to be happening a couple of weeks ago, Fed Chairman Ben Bernanke and other central bankers stepped in, lending cash in exchange for mortgage securities.
Now things are calmer, but many on Wall Street and in the business world are clamoring for more, for a cut in short-term interest rates to boost the economy. It was super-low interest rates, though, that got us into this trouble in the first place. Investors looking for higher yields bought ever-dodgier securities backed by mortgages and other assets. The Fed shouldn't be in the business of bailing them out or encouraging such speculative excess. That's the fine line Ben Bernanke and the Fed have to walk. If they're too stingy, they might bust the global financial system or at least bring on a bad recession. If they're too generous, they risk inflating another bubble. I sure hope they get it right. I'm Justin Fox.
