The American Spectator

I agree that there is a growing tendency in this country not to hold individuals responsible for their actions. However, this state of affairs is primarily the result of the excessive litigiousness of a population teeming with accommodating lawyers, and blame should not be laid on highly competent public officials such as Ben Bernanke, who is just doing his job. Mr. Bernanke’s actions are about as far from panic as you can get: he is simply attempting to stabilize a financial system that is teetering out of control.

If the purchase of Bear Stearns by JPMorgan Chase is completed as planned, the latter will get a bargain, but the shareholders of Bear Stearns, including employees who own thirty percent of the stock, will be out billions of dollars. Describing this event as a bailout is not accurate. It could be argued that the actions of the Federal Reserve Board are preventing a collapse of our financial system that could ultimately cost the public trillions of dollars and cause a depression.

p>Mr. Klein’s comments are more applicable to Alan Greenspan than to Mr. Bernanke. While it is not the responsibility of the Fed to create regulations that prevent these disasters, it is its duty to make suggestions to Congress when dark clouds are gathering on the horizon. Mr. Greenspan’s cavalier laissez-faire attitude practically ignored the development of the dot-com and housing bubbles and the current credit crunch. To the extent that these outcomes are predictable, the Fed should be raising flags. In the case of any bubble, that could take the form of stern warnings of the consequences to frenzied speculators and ignorant consumers. Clearly, in hindsight, some new regulations concerning mortgage lending practices would have been beneficial. An economic case can be made for the lowering of the federal funds rate to one percent in July, 2003, but I suspect that interest rates were kept too low for too long without much thought of the ensuing market excesses. br> — Paul Dorell br> Evanston, Illinois /p>

I am surprised by how much nominally conservative writers on economics and finance have forgotten their economic history. Perhaps the new generation of economists and free marketers only give lip service to the work of Milton Friedman instead actually reading his work. Those of us who came of age as monetary economists in the 1960s and '70s religiously studied Professor Friedman’s works. In The Monetary History of the United States Milton and Rose Friedman describe how the Federal Reserve turned a deep recession and correction into the Great Depression by failing to support liquidity in the banking system and precipitating two waves of bank failures.

Today’s financial crisis bares a strong similarity to events in 1929-31. However, Mr. Bernanke seems to have read his history and is taking steps to ensure that the banking system remains liquid even it means bailing out an failing investment bank. He also seems to be trying to avoid the key mistake that led to the second wave of banking failures in 1931-33 that almost brought down the nation. The banking and financial system stabilized by 1931 but then European nations abandoned the Gold Standard. Instead of letting gold float, the Fed attempted to defend the dollar as gold reserves left the country. The result was a second liquidity crisis that resulted in a nationwide banking collapse. Had the Fed provided liquidity instead of defending the dollar there would have been no Great Depression.

The literature on exchange rates makes clear that floating a country’s international value decouples domestic monetary policy from international shocks. It allows the monetary authority to concentrate on either controlling inflation or providing necessary liquidity in a crisis. A weaker dollar will have negative repercussion but they will be far less then if a dollar defense wrecks our financial system.

p>The purpose of monetary policy is to ensure that the system remains liquid in crisis. The Federal Reserve should be applauded for its wisdom in fulfilling this role today. br> — Jerrold Goldblatt br> Arlington, Virginia /p>