Rep. Scott Garrett (R-N.J.), a strong economic conservative, is one of the very few politicians questioning the Federal Reserve Bank’s Bear Stearns bailout, which I write about here today. A new report from the Congressional Research Service characterizes the Fed’s “loan” to JP Morgan as something more resembling an “asset sale.” Garrett’s description is more accurate — he calls it as a “put option,” a bet by JP Morgan that the securities used as collateral are worth less than $29 billion.
Either way, this affects the taxpayer. The Fed’s entire year’s worth of profits, normally remitted to the Treasury, will now be tied up in mortgage-backed securities that no one wants to buy. In two years, the government will begin selling the “collateral” on this so-called “loan” (like everything else in the deal, this is highly irregular), and no one is sure how much they will get for it. In the meantime, the government will presumably have to borrow more money (or else raise taxes) in order to finance its regular operations.
The CRS report also notes that the Fed has not done anything like this since the power to loan to corporations or individuals in “exigent circumstances” was added to the Federal Reserve Act by amendment in the 1930s. There is great irony in the fact that our sophisticated financial world is reaching back to New Deal legislation in order to conduct what really amounts to a bailout of Bear Stearns bond-holders and to facilitate what might be the best deal JP Morgan has ever made. And you have to wonder — just who are Bear’s creditors, anyway?
Garrett will be on Bloomberg to discuss the economy today at 12:30.