The more the U.S. Federal Reserve does to avert financial contagion, the clearer it becomes that the Fed alone cannot solve the problems in the financial system.
It's now obvious that American taxpayers will have to step in. Less obvious is that
if the United States government doesn't stabilize the markets,
foreign governments increasingly will, in exchange for an ever larger stake in the American financial system.
...
The Fed's huge loans and interest rate cuts can buy time for flagging banks. They can also help prevent specific problems, like last weekend's near collapse of Bear Stearns, from causing a chain reaction.
They cannot save defaulting homeowners, transform bad mortgage loans into good ones, or do the same for hundreds of billions of dollars of securities tied to those loans.As those problems persist, financial institutions are under increasing pressure to write off their losses, cutting ever deeper into their capital.
As capital shrinks, creditors have to clamp down on lending, to good and bad borrowers alike, no matter what the Fed may do. That is why Paulson and the Fed chairman, Ben Bernanke, have been hounding financial companies to raise more equity. In the first round of write-downs, Citigroup, Merrill Lynch and Morgan Stanley raised tens of billions of dollars from cash-rich foreign governments, including Abu Dhabi, China, Kuwait and South Korea.
It's clear that
the Bush administration and Bernanke would welcome greater ownership of the nation's financial institutions by foreign governments. That's an effective short-term fix, and could conveniently avert a financial meltdown on their watch. But it also means a long-term transfer of a chunk of the future revenues of the American financial system to foreign governments.
IHT
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