Ben Bernanke, Kingmaker

Yesterday the stock market shot up over 400 points, the largest one-day gain in over five years. Why? Because Ben Bernanke, the Federal Reserve Chairman, offered up $200 billion in loans to the top 20 investment banking firms in the country. Banks have been caught in a credit crunch caused by the subprime mortgage mess and need liquidity—cash that can be used to make investments. The stock market got all excited yesterday and went on a big run, and as I write this the Dow is up again this morning.

I am struck by two aspects of this story. First, there is the dizzying power of being able to move such enormous sums of money with the flick of a wrist. In contrast, the $170 billion economic stimulus package was hotly debated before Congress and the President would sign off. Of course, the rebates of the stimulus package are permanent disbursements, and the Fed is offering loans. But the imbalance in oversight and accountability is daunting. Those who serve the banking industry can move government funds quickly and with impunity. Those who serve the individual consumer must summon a great effort to do so.

The second and most important observation is that the Fed’s action is another short-term fix. There is still great worry about underlying value of mortgages in the US, and Bernanke’s action is another demonstration of the government’s responsiveness when it comes to the quick fix. But there is far greater reluctance to take on the true causes of economic instability. Why? Because some of these problems are difficult to solve (e.g., health care) and the solutions to others will be attacked by the powerful banking and business interests (e.g., mortgage lending and credit card industry reforms, wage and job security increases). Unfortunately, I have little faith that free markets will correct the kinds of problems we face today. We need a serious change of direction, away from the highly leveraged consumer-driven economy of the recent past, and it is unlikely that change will come without strong leadership.