ND Expert: Fed now financial market's "pawn broker"

Author: Arts and Letters

Though the Federal Reserve’s bailout of Bear Stearns was meant to provide a safety net for the nation’s economy and keep the credit crisis from destroying the financial industry, University of Notre Dame economist Christopher Waller is skeptical of the move.

“The Fed is increasingly moving into new territory regarding its interventions into the financial markets. The bailout of Bear Stearns is unprecedented and now sets the standard that the Fed will be lender of last resort to anyone whose position threatens financial instability,” says Waller, who specializes in political economy and monetary theory.

Waller’s doubts about the wisdom of the Federal Reserve’s intervention are shared by some investors who question whether the move will put the central bank at risk of substantial losses.

“At the end of the day, Bear Stearns essentially was bankrupt, so the only key thing the Fed did was buy up incredibly risky mortgage backed securities that JP Morgan would not purchase at any price,” Waller says.

“Again, the fact that the Fed would buy such assets is shocking to me. It has now become the financial market’s pawn broker – it will buy any junk that is brought to them.”

A member of the Notre Dame faculty since 2003, Waller is the Gilbert F. Schaefer Professor of Economics at Notre Dame and has served as a visiting scholar at the Federal Reserve Board of Governors, the Federal Reserve Banks of St. Louis and Cleveland, the Central Intelligence Agency, and the Economics Education and Research Consortium. His research has been published in several top economic journals including “American Economic Review,” and “Journal of Monetary Economics.”

Media Advisory: Waller’s comments may be used in whole or in part. He can be reached for further comment at 574-631-4963 or cwaller@nd.edu .

Originally published by Susan Guibert at newsinfo.nd.edu on March 18, 2008.