Fed Still Keeps Us Guessing with Rescue of Bear

Op-Ed

Fed Still Keeps Us Guessing with Rescue of Bear

Author:
Amity Shlaes, Senior Fellow for Economic History

March 26, 2008
Bloomberg

More government is the remedy that the U.S. Congress is reaching for as it moves to evaluate the Bear Stearns Cos. disaster. Yet as the story of another banking catastrophe reminds us, government involvement can also be a curse. What’s especially problematic is when the role of public officials and institutions is unclear.
In 1913, Congress was busy creating a central bank for the U.S., the Federal Reserve Board, to serve as lender of last resort. The Fed was supposed to provide an additional source of liquidity to banks that formerly relied on state-level networks alone, such as the New York Clearing House.
Defining “chutzpah” for those not yet familiar with the concept, a group of Jewish small-timers in New York called a bank they were chartering that same year “Bank of United States.”
Observers made their irritation known. It started with the name’s odd article-less-ness. “Bank of United States,” instead of “Bank of the United States,” sounded illiterate.
Worse, though, was the sense that such a name would trick gullible immigrants into believing their deposits were government backed. The founders were recalling the Fed’s predecessors, the First and Second Banks of the United States. “Such an honored name should not be dragged in the mud on the Lower East Side of the city,” an opponent told the New York Times.
The Bank of United States confounded the critics by keeping its name and proving a success story. It identified markets that more traditional banks ignored—the garment trade, for example—and profited from that insight. Its branches proliferated. Its immigrant depositors thrived. Its shares were traded on the Curb. And its executives likely believed they were making headway in penetrating that old New York establishment.

View full text of article
New CFR Books

In Termites in the Trading System, Jagdish Bhagwati reveals how the rapid spread of preferential trade agreements endangers the world trading system.

America Between the Wars explores how the decisions and debates of the years between the fall of the Berlin Wall and the collapse of the Twin Towers shaped the events, arguments, and politics of the world we live in today.

In The Fall and Rise of the Islamic State, Noah Feldman tells the story behind the increasingly popular call for the establishment of the sharia—the law of the traditional Islamic state—in the modern Muslim world.

Complete list of CFR Books.

New Independent Task Force Reports

Confronting Climate Change

This report argues that the United States must lead with domestic action on climate change and proposes a U.S. negotiating strategy for a global UN climate agreement that includes commitments from all major economies, while also promoting a less formal Partnership for Climate Cooperation that would focus the world's largest emitters on implementing aggressive emissions reductions.

U.S.-Latin America Relations: A New Direction for a New Reality

This Task Force report examines changes in Latin America and in U.S. influence there, while taking account of the region's enduring importance to the United States. The Task Force offers an agenda for U.S. policy toward Latin America and identifies four critical areas that should provide the basis of a new U.S. approach.

About Independent Task Forces at the Council.

Op-Ed

Fed Still Keeps Us Guessing with Rescue of Bear

New CFR Books

New Independent Task Force Reports

Confronting Climate Change

U.S.-Latin America Relations: A New Direction for a New Reality