Monday, August 06, 2007

Former Fed Official: No Fed Bailout Of Wall Street

I'll believe this when I see it, because my experience has been that the Federal Reserve is an institution whose sole job is to help Wall Street:

WASHINGTON (MarketWatch) -- Participants in financial markets shouldn't get their hopes up that the Federal Reserve will intervene to alleviate the current market turmoil, a former Fed governor says.

"I think it is too early right now to think about any kind of intervention by the Fed," said Susan Phillips, now the dean of the George Washington University business school in Washington, in a telephone interview.

Phillips said that the financial markets' volatility is a painful but healthy "reality check" and that this has led to an overdue repricing of risk.

"We're in the middle of that process," Phillips said. "The Fed wants the market to find its own right place," she said.

"We're seeing some constriction in some of the high-risk markets, but quite frankly, that is probably appropriate," Phillips said.

The Federal Open Market Committee will meet to consider U.S. monetary policy on Tuesday.
At the moment, the emerging consensus among Fed watchers is that the Ben Bernanke-led Fed will hold interest rates steady but that the policy statement released after this week's meeting will add some wording about the troubles gripping the subprime mortgage sector.


For her part, Phillips said she thinks the Fed will hold its tongue on the market turmoil.
"To me, it is something like a 60% chance they won't say anything because they don't want to intervene," Phillips said.

Phillips also said that the Fed under Bernanke likely has a very high threshold to meet before it would intervene. In essence, Fed officials would only ease if the financial markets are close to becoming "inoperable."

As Phillips sees it, the Fed might ease interest rates "if we were to have one of the really major [Wall Street] firms go under -- not one of the subprime operators -- and that caused severe liquidity problems in the market," she said.

Phillips, a member of the Fed under previous chairman Alan Greenspan for seven years in the 1990s, said financial markets are much stronger today then when the so-called "Greenspan put," which guaranteed a market floor, held sway.

"You have much better capability now to manage risk and if you look at the quality of the balance sheets of both banks and the private sector -- the quality of those balance sheets is so much better than the early 1990s," Phillips said.

"Markets are more resilient than they were during Greenspan's early years," Phillips added.

Right now Wall Street is pricing in a change in tone in tomorrow's Fed statement - the Dow has been up as much as 131 today and the S&P and the Nasdaq are both up double digits.

Clearly they expect a "Bernanke put" to be acknowledged in tomorrow's statement.

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