Fed intervenes in the US Market!

There is market intervention, and there is market intervention. But when it's done by the Fed, it's called saving the economy.

In 1998, currency speculators attacked the Thai Baht, and then went the rounds of other Asian countries bringing down the value of the local currencies and making a huge profit in the process. Shades of George Soros attacking the UK pound sterling.

The HK Governemnt instigated a series of controls limiting the ability of speculators to borrow HK dollars for short selling. Unlike the other Asian countries, HK did not have any external debt denominated in foreign currencies that could be called in. The speculators decided then to use the HK stock market as a proxy and borrowed HK stocks instead. They sold the HK stocks for HK dollars and then sold the HK dollars for US dollars, hoping to drive down both the HK dollar and HK stocks, and doubling up their winnings.

The HK governemnt spent HK$120 billion of our foreign currencies reserves buying up blue chips in the HK stock market, and was successful in halting the slide from 16,000 on the Hang seng Index to around 6,000. HK was facing a financial abyss. If the government had not intervened, the stock market would have collapsed first, and then followed by the housing market, and the rest of the economy.

The HK Government was roundly castigated for intervening in the free operation of the market by "international community" i.e. those had the most to gain by a collapse of the HK dollar and the HK stock market, and by academics in their ivory towers. As it turned out, the stock market rebounded, and the HK governemnt put the majority of the shares purchased into an exchange trade fund which is still the largest ETF in the world. By the way, the HK residents were given a discount when the ETF was floated on the HK stock market, and those who held on for 2 years were given bonus shares.

I personally believe that the Fed has a duty to defend the economy from a financial meltdown. In fact, I had pointed out earlier that the Fed's action was too late and too timid. Until now. But this begs the question of why is it ok for the Fed to intervene in a commercial transaction? The point is the Fed is lending US$30 billion to a commercial enterprise (JP Morgan) to take over another commercial enterprise (Bear Stearns). And this is a non-recourse loan. Of course, if the value of the bonds subsequently recover, the Fed will be make a profit. I hope that the Fed will consider putting this into a listed vehicle and letting the US taxpayers benefit because after all it is their money at risk.