Speaking at the Pims conference last week on board the Arcadia, Lombard Street Associates director Professor Michael Oliver described the Fed’s strategy as “like trying to revive an alcoholic with a bottle of whisky.”
He said: “Arguably, the tendency for monetary regulators to respond to widespread market drops with action that puts more cash into the system creates moral hazard.
“If the Fed’s new policy of extending liquidity help to investment banks as well as commercial banks might by itself have been enough to keep Bear Stearns in business, then what was the reason to delay its announcement until after a virtually forced sale of the Bear to JP Morgan, with major Fed quasi-equity participation?”
He claimed that the Fed has 14.5bn at risk in the Bear Stearns’ deal compared with JP Morgan’s 3bn, with the Fed understood to have swapped 125bn-150bn of Treasury securities to support the market.
Oliver said: “This comes close to a covert partial nationalisation of the banking system.”