Ben Bernanke, chairman of the U.S. Federal Reserve, arrives at the Federal Reserve building for a Federal Reserve Open Market Committee meeting in Washington, April 29, 2008. Photographer: Brendan Smialowski/Bloomberg News
May 2 (Bloomberg) — A month after the Federal Reserve rescued Bear Stearns Cos. from bankruptcy, Chairman Ben S. Bernanke got an S.O.S. from Congress.
There is “a potential crisis in the student-loan market” requiring “similar bold action,” Chairman Christopher Dodd of Connecticut and six other Democrats wrote Bernanke. They want the Fed to swap Treasury notes for bonds backed by student loans. In a separate letter, Pennsylvania Democratic Representative Paul Kanjorski and 31 House members said they want Bernanke to channel money directly to education-finance firms.
Student loans are just the start. Former Fed officials and other Fed-watchers say that Bernanke’s actions in saving Bear Stearns will expose the central bank to continuing pressure to use its $889 billion balance sheet to prop up companies or entire industries deemed important by politicians. The Fed satisfied Dodd’s request today, expanding the swaps to include securities backed by student debt.
“It is appalling where we are right now,” former St. Louis Fed President William Poole, who retired in March, said in an interview. The Fed has introduced “a backstop for the entire financial system.”
Critics argue that the result will be to foster greater risk-taking among investors emboldened by the belief that the government will bail them out of bad decisions.
The Fed’s loans to Bear Stearns were “a rogue operation,” said Anna Schwartz, who co-wrote “A Monetary History of the United States” with the late Nobel laureate Milton Friedman.
“To me, it is an open and shut case,” she said in an interview from her office in New York. “The Fed had no business intervening there.”
Read moreFed `Rogue Operation’ Spurs Further Bailout Calls