Federal Reserve Bank Reeling, U.S. Policy Roadblocked

The global financial markets are teetering on the brink of panic after barely escaping the collapse of the U.S. investment bank Bear Stearns. The U.S. Federal Reserve Bank is doing what it can to stop the fall, lowering the interest rate at a more rapid pace, pumping hundreds of millions of dollars into the market, and paying to rescue a bank from bankruptcy. But these measures are losing steam, as the financial crisis triggers more crises: the falling exchange rate and the U.S. economy without a doubt now in a recession. The Cassandra calls increasingly warn of an inevitable financial meltdown of global proportions.

Up until now, the reaction of the government in Washington to the situation taking place in the not-too-distant Wall Street in New York is itself cause for concern. Apparently totally unfazed by these dramatic developments, U.S. President George W. Bush and his treasury secretary Henry Paulson have been preaching since Friday of the usual highs and lows, the good and bad times that occur in the country’s economy. Government intervention in these types of situations is the wrong thing to do – the usual response from the conservative right. Bush is convinced that the U.S. economy remains the envy of the world in any case, an assessment bringing gasps of astonishment to even the most conservative financial circles in the United States.

However, ostentatious optimism is no replacement for policy. Having the Federal Reserve put out fires is not a solution to a problem that caused the overheated and deregulated housing market to combust. The government could easily do something, by providing assistance to home owners by preventing additional foreclosures and therefore put a damper on any further devaluation in the mortgage market. The government can only earn long-term trust in the market when it gives up its pigheaded antiregulation policy. A doctrine stating that the government must keep itself out of the economy – given how Bear Stearns was just saved at taxpayers’ cost – is hardly worth the paper it’s printed on.