Fed chairman Ben Bernanke gave his first speech in a month today (although I guess he did do some testifying a couple weeks ago). In typically laid-back Bernankian fashion he described all the crazy stuff that’s been happening, described the response by the Fed, Treasury and FDIC, and said that he believed these “bold actions … together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery.”
The stock market spent most of the speech dropping, not that that necessarily means anything. And one passage from the speech, when he was talking about the $700 billion Troubled Asset Relief Plan, struck me as particularly interesting:
Importantly, the legislation that created the TARP does provide sufficient flexibility to allow for different approaches to solving the problem–subject, of course, to the close oversight that will ensure that the program’s funds are used in ways that are in the interest of taxpayers.
I think it’s accurate to say that a majority, or at least a plurality, of academic economists think Treasury would do better to use its $700 billion not to buy mortgage securities on the open market but to recapitalize banks and take big equity stakes in them–a partial and presumably temporary nationalization of much of the banking system.
The language of the legislation creating TARP does seem to allow for this. Treasury can buy assets directly from a particular financial institution, and is required to demand a significant stake in return. Is Bernanke already hinting at a pivot in this direction?