Be sure to read the accompanying article that explores the moral hazard question prompted by the Fed's recent injection of liquidity into the market. Bottom line here is simple:
- A federal bailout of shaky subprime lenders would amount to a "subsidy for risky behavior," says Christian Stracke, a senior credit strategist at the research firm CreditSights. "You would encourage future risky lending and borrowing by signaling that in extreme circumstances, the government … will bail out bad lenders," he says.
- but some industries, indeed some companies, are so integral to the U.S. economy that they cannot be allowed to fail — nevermind how they got into trouble in the first place, argue others. The "too big to fail" theory came into play a decade ago, when the Federal Reserve intervened to rescue the giant hedge fund Long Term Credit Management. The fund, initially a huge success when it was founded in 1994, lost more than $4 billion in 1998. The Federal Reserve put together a bail-out by the major creditors to avoid a wider collapse in the financial markets.
- "Credit flowing to American companies is drying up at a pace not seen in decades, threatening the creation of jobs and the expansion of businesses, while intensifying worries that the economy may be headed for recession."
- The Fed injected $8 billion into credit markets in preparation for the holiday season
- Bernanke hinted today, in line with his deputy's hint yesterday, that the Fed is likely to cut interest rate cuts soon (again).
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