The World from Berlin 'Something America Can Afford Less Than Ever'

As the US financial crisis deepened, the Federal Reserve stepped in to prevent a panic. How did things get so bad so fast, and is Fed Chairman Ben Bernanke's unprecedented intervention in the stock market a bad idea?


Ripples from the financial crisis in the US have brought the German DAX index to its lowest levels since November 2006.
DPA

Ripples from the financial crisis in the US have brought the German DAX index to its lowest levels since November 2006.

The crisis in the world's financial markets continues to grow. On Monday, Bear Stearns -- one of Wall Street's biggest investment banks -- was bought by another bank in a sale engineered by the US Federal Reserve, which guaranteed a $30 billion credit line to help seal the deal.

The Fed's involvement in the market didn't stop there. The bank announced that it would loan hundreds of billions of dollars to bail out banks whose risky mortgage investments brought the American market to the brink of collapse.

The moves amount to an unprecedented level of political involvement -- some might say meddling -- in the American stock market. Worried that a panic on the financial market might lead to an all-out collapse, Fed Chairman Ben Bernanke intervened. Some argue that the move was necessary to avoid a cataclysm. But others point say the Fed's cheap loans and low interest rates risk making things worse by encouraging inflation and giving banks free rein to continue their risky behavior, knowing the government will step in to bail them out in case things go wrong.

German commentators are following the action in New York on Tuesday, mindful of the American market's impact on the global economy.

From New York, Spiegel Online correspondent Marc Pitzke writes:

"How many of Bear Stearns' 14,000 employees will lose their jobs is unclear. JP Morgan Chase may keep the bank's core and chop off the rest. Either way, for most this is a catastrophe. Almost a third of the firm is owned by employees for whom Bear Stearns stocks represent the majority of their salaries, their retirement savings and their kids' college funds."

"Now they're as good as worthless: JP Morgan paid $2 for stocks that were once worth $170. That hits the junior trader as hard as big investors like British billionaire Joseph Lewis, who bought a billion dollars' worth of Bear Stearns stock at $100 a share -- and has now lost $980 million."

"Who's next? Bear Stearns was an odd duck, but not unique when it comes to the credit-crisis fallout. 'The pain,' the Wall Street Journal pronounced on Monday, 'may last well into 2009.'"

Berlin's conservative daily Die Welt worries the Fed is on the wrong track:

"The important question now is whether the central banks are in a position to regain the trust of the markets. It's reasonable to have doubts: Unfortunately, the Federal Reserve has stepped in to the rescue so many times in the past two years that even the most severe measures don't seem to work any more. Now the folly of these policies is becoming clear. The lessons must wait for another day -- hopefully after a global market crisis has been dodged, yet again."

Financial Times Deutschland has harsh words for American politicians:

"The government intervention in this crisis is cause for new concern. For one, the new actions and interventions of the Fed leave the impression that the problems behind the scenes must be much greater than what's been made public so far. It's also an absurd contradiction when the president meets with his top economic advisers and announces that everything's 'under control.' When something is really 'under control,' the White House doesn't get involved. George W. Bush is also not known for being tremendously curious about the details of the stock market."

"There's also the danger that the Federal Reserve will be over-influenced by bankers' pleas … This dynamic is dangerous, because it threatens to further undermine faith in the dollar. Its precipitous decline on the currency markets -- along with the latest price records in oil and gold -- are warning signs we should take seriously."

"Naturally the US economy profits from a depreciation-driven improvement in competitiveness. But to stop the falling real-estate and stock markets and stabilize its reeling banks, America needs lots of fresh foreign capital. A global retreat from the greenback is something America can afford less than ever."

Center-left Süddeutsche Zeitung supports regulating the global economy:

"The current crisis and the rescue attempts by politicians have caused a lot of understandable anger. After all, it was irresponsible speculators and bad bankers who brought the financial system to the brink of disaster in the first place. They used highly complex new financial instruments that they themselves -- or at least the regulatory bodies in charge -- didn't fully understand. And those regulators have been hopelessly behind the pace of the market's innovations."

"The anger over all the misbehavior shouldn't lead to the wrong conclusions. Despite the crisis, global markets have worked properly. They have, for example, given lots of once-poor countries access to credit and capital and thereby helped correct imbalances in global trade. Reserve banks and government officials must now work together quickly and effectively to regain the confidence of investors."

And the center-right Frankfurter Allgemeine Zeitung suggests the crisis may be the start of a much wider shift:

When huge banks near collapse, it is serious. The New York investment bank Bear Stearns wasn't the world's biggest, but it was a force to be reckoned with, with decades of experience in the stock market. Just a year ago Bear Stearns was worth about twenty billion dollars; last weekend it sold to competitor JP Morgan in a rushed auction for a little more than two hundred million. Otherwise it would have gone bankrupt. The nervousness of the finance markets over this latest development is understandable, since now no one knows if another bank will soon be fighting for its life.

The turmoil on the financial markets only supports the wisdom that central banks shouldn't try to control a crisis with miracle cures. Traditionally, central banks try to solve financial crises by making more money available and sinking interest rates -- i.e. making existing money cheaper to borrow. The Fed has been using this strategy for months in a vain effort to calm financial markets. The failure of this policy threatens to damage the prestige of the most important central bank in the world. Now the position of American banks has failed to improve, while the risk of inflation has gone up. History books may one day mark the frightening fall of the dollar that has accompanied this crisis as the beginning of the end of America's financial hegemony.

-- Andrew Curry, 12:45 CET

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