One of the lessons of this year's economic crisis is that the reputations of Federal Reserve chairmen are not written in stone the day they step down from their office. Alan Greenspan, lauded hither and yon as the Maestro, looks worse and worse each day, as we watch his Ayn Rand-influenced philosophy of deregulation unmasked by Wall Street's folly. In contrast, his predecessor, Paul Volcker, looks better and better. As a Wall Street Journal article reporting on how Volcker has become one of Barack Obama's top economic advisors notes, "his gruff warnings about the risks of deregulating the financial sector have come to look prescient."
So it's safe to say that we've got a very long way to go before we can close the book on Ben Bernanke's legacy. But when that book does get written, I can guess at least one sentence that will be included in the text: Ben Bernanke did not stand around doing nothing while the global financial system crumbled. He was a busy, busy bee.
On Tuesday, the Federal Reserve announced yet another initiative aimed at unsticking the credit markets -- the Money Market Investor Funding Facility (MMIFF) -- "which will support a private-sector initiative designed to provide liquidity to U.S. money market investors."
The Federal Reserve on Tuesday said it would finance up to $540 billion in purchases of short-term debt from money market mutual funds, in its latest move to shore up the bedrock of the U.S. financial system.
The U.S. central bank will lend money to five special purpose vehicles, which will be managed by JPMorgan Chase and tasked with purchasing certificates of deposit, bank notes and commercial paper with three-month maturities or less from highly-rated institutions.
The new lending facility comes at the same time as evidence continues to pour in that credit markets are responding aggressively to the various rescue plans orchestrated by the Fed, the Treasury and foreign governments. By one measure, reports Bloomberg, the interest rate that banks charge each other for loans has fallen "to the lowest level since Sept. 12, the Friday before Lehman failed." Also possibly worth noting: The Federal Reserve defends the creation of the MMIFF by stating that "short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs."
But the Financial Times also reports that last week, money market funds recorded the largest weekly inflow of funds -- $44 billion -- since 2001. That doesn't yet make up for the $200 billion outflow money market funds registered in September, but does seem to indicate a healthier climate, overall, for money market funds.
Is the Fed taking this new step because it is worried that the recent improvement in credit markets is too fragile? Or is this a case of overkill? I don't know the answer to that, but I do think that Bernanke will not be criticized by future economic historians for doing too little to keep financial markets liquid.
One last note: According to the Financial Times, the new special-purpose vehicles set up to buy money market fund CDs and other commercial paper will be managed by JPMorgan Chase, a bank that has emerged throughout this year of troubles as the U.S. government's right-hand man for troubleshooting. JPMorgan took over Bear-Stearns at the federal government's request, and then, under strong pressure from regulators, swallowed up Washington Mutual. Now it's "administering" another half-trillion-dollar lending facility.
JPMorgan's CEO, Jamie Dimon, has been rumored as a possible choice for Treasury secretary in an Obama administration. Could be a smart pick, if only because Dimon would take office with an intimate grounding in exactly how the federal government has already chosen to address the financial crisis.