Ben Bernanke Facing Brickbats As Well As Kudos for His Foreclosure Mitigation Plans

April 15th, 2009

Ben Bernanke, the chairperson of the Federal Reserve started taking some measures to address the foreclosure crisis from August 2007 for which he has been facing brickbats as well as kudos. Some say he did the right thing while others opine that he should not have overextended himself. A sizeable section of the economists feel that if he had not stepped in, the situation would have been allowed to spin out of control as it did during the Great Depression. At that point of time the government remained a spectator only with disastrous consequences. But Bernanke and his team have not allowed this to happen. Perhaps the foreclosure situation remains bad but it would have been worse if Bernanke had not initiated the measures.

Professor Franklin Allen of Wharton (Pennsylvania University) however has reservations about the rate cuts Bernanke has been taking because it could fuel inflation. The safety net thrown out to Bears Stearns would also set a precedent for other banks to take undue risks and then clamour for help.

The Investment banks mainly have transactions with companies and different financial bodies dealing with stocks, bonds, mergers and takeovers. These banks were involved in packaging the sub-prime loans, slicing them into securities and selling them to global investors. As a consequence of the foreclosure crisis these banks have suffered enormous losses.

The new lending programme is not transparent and Allen commented, “I think …we are in the unknown. We haven’t done this before. On the face of it, it looks as though it helps the markets. But I think we have to wait and see.”

The move by the Fed’s to cut rates has grabbed the headlines. From 5.25% in September 2007 it went to 2% by the end of April 2008. Another stunner was the step taken by the Feds to pump in $29 billion of taxpayer’s money to address the problem of Bear Stearns. However these moves have assured the markets that the feds have enough funds to allow the markets to move smoothly. Hundreds of billions have been made available for the granting of short-term loans and taking back the securities that have mortgage backing. Other risky instruments have also been taken by the feds. This is something the government has never done before.

Traditionally the feds focus on the commercial banks but this time it has come forward to assist the investment banks – with good reason.