Thursday, August 23, 2007

Problems the Fed Faces - 20th-Century Tools in a 21st-Century Market

The excerpts below from an article in the WSJ is very interesting because it discusses the problems the tools the Fed has that were created to handle an early 20th-century economy in an early 21st-centurn environment. If you don't have a subscription to the online WSJ, try page A2 of Thursday's edition.

Think, for a moment, of bearded, bookish Ben Bernanke as the chief mechanic looking under the hood of the U.S. economy.

His problem: He's got tools designed for an early-20th-century Model T Ford to fix a 21st-century computer-controlled hybrid.

The Federal Reserve was created in 1913 and equipped to prevent and respond to banking panics. When banks need cash and can't sell their assets or borrow against them because markets are panicked, the Fed lends freely to banks with good collateral.

But the Fed chairman's challenge is that bank finances aren't today's primary problem. Banks are flush but are reluctant to lend at a time when everyone else with money is also uneasy about lending. Nonetheless, Mr. Bernanke and his monetary mechanics are stuck using 1913-era tools designed for a bank-centric financial system to repair a 2007-era market-centric financial system.

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