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Economist Milton Friedman argued--and eventually convinced most of his colleagues--that it was the Fed's failure to keep enough dollars in circulation that made the Great Depression such a great disaster. No Federal Reserve chairman will ever let that happen again, so we probably shouldn't worry too much about bread lines and Hoovervilles in the near future. But the money supply is a blunt instrument, one that comes nowhere near addressing all of today's problems. "The issue is not one of liquidity but one of solvency," says Richard McGuire, a strategist at RBC Capital Markets...
...greatest power of the fed is that it can create dollars at will. It gets those dollars into the economy by buying Treasury securities on the open market. When you hear the Fed is cutting rates, that usually means it's ordering the traders at the Federal Reserve Bank of New York to start buying, and that drives short-term Treasury rates down...
Bernanke, himself an authority on the Depression, has been pushing ever more creative and aggressive means to avoid this, mostly by lending cash or Treasuries in exchange for mortgage securities. The Fed persuaded JPMorgan Chase to buy Bear Stearns in part by agreeing to lend $30 billion against hard-to-sell mortgage securities on Bear's books...
...general feeling in Washington seems to be that the Bear deal "threads the needle in the right way," as Democratic Senator Charles Schumer put it. But if Fed-arranged fire sales become a regular event, questions will inevitably arise about moral hazard and playing favorites. "They stepped into a vacuum, and I think quite appropriately," former Fed chairman Paul Volcker said on Charlie Rose. "But is this what you want for the long-standing regulatory support system? My answer...
Alan Greenspan The king of easy money and little oversight kept the economy greased with low interest rates, but now the former Fed chairman is answerable for having made lending too available, especially to people who really couldn't afford to borrow...