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What the Fed should demand in return

Robert Reich

TEXT OF COMMENTARY

Scott Jagow: Whether you call it a bailout or not, the Fed is aggressively intervening in Wall Street's business. Backing the Bear Stearns deal, assuming bad loans, slashing interest rates.

Commentator Robert Reich has no problem with the Fed stepping in -- as long as it demands something in return.


Robert Reich: Speculative bubbles have to burst, one way or another. The Fed bailing out the big banks is like someone with a helium tank blowing more air into a leaky balloon. It only postpones the inevitable, which is the balloon will deflate and float back to earth.

How did we get here in the first place? Back in 2003, the Fed cut interest rates to 1 percent, and made money so cheap lenders were pushing it out the door to anyone who could stand up straight. And until this speculative bubble finally and fully bursts, we won't be out of this mess.

But for this to happen, Wall Street will have to face its real losses and write off another hundred billion or so. And homeowners across America will have to face their losses and watch the value of their houses drop another 10 percent, about where they were before the bubble.

The danger is the burst comes so fast and furiously, everyone runs for the hills and takes their money with them -- meaning runs on banks, massive housing foreclosures, and runs on the dollar. Fed bailouts can reduce these panics, one reason why the Fed was set up in the first place.

But the Fed should demand from Wall Street banks two things in return. First, they become more transparent, pricing assets at their real market values and not hiding bad loans off their books. Nobody's gonna trust Wall Street banks until they're squeaky clean.

And secondly, that the big banks set up a lending window that temporarily subsidizes delinquent home mortgages -- at least until mortgage interest rates drop to just above the Federal funds rate.

In other words, the goal shouldn't be to prevent or postpone the burst, but avoid over-reactions in financial markets and excessive harm to individuals. And if the Fed is gonna bail out the big banks, it's only fair that the big banks clean up their acts, and also pay part of the damage their lax standards have caused.

Jagow: Robert Reich was Labor Secretary under President Clinton. His latest book is called "Supercapitalism."

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