Financial Meltdown Too Large for Free Market to Fix, Bernanke Says

By Josiah Ryan | October 7, 2008 | 6:25 PM EDT

The $700 billion infusion of U.S. Treasury funds into mortgages and mortgage-backed securities is necessary because the free market is incapable of making such a massive investment, Federal Reserve Chairman Ben Bernanke said.

(CNSNews.com) -  The $700 billion infusion of U.S. Treasury funds into mortgages and mortgage-backed securities, which will begin later this week, is necessary because the free market is incapable of making such a massive investment, Federal Reserve Chairman Ben Bernanke told members of the National Association of Business Economics (NABE) at their annual meeting in Washington on Tuesday.
 
A free market economist from the libertarian Ludwig Von Mises Institute, however, told CNSNews.com that while private investors may not have had $700 billion available to purchase shaky investments, it was a financial venture too risky for them to take anyway.
 
“Given the scale of the losses in portfolios, raising enough capital from private investors wasn’t feasible,” Bernanke told the NABE. Also, “their government sponsored status precluded a merger or acquisition from other companies.”
 
But Mark Thornton, a senior analyst at the Mises Institute, told CNSNews.com that investors were not interested in investing in companies like Fannie Mae and Freddy Mac, because it was too risky.
 
“True, the market is not going to raise the capital for these failing companies,” said Thornton. “It would have let them fail, which is precisely what it should be doing.
 
“The bailout approach is the problem,” said Thornton. “Bernanke is assuming that the market needed the capital to make all of these firms and businesses solvent. That is simply not the case. Bernanke thinks he needs to pay for all of this stuff to work, when in reality these business models and the products they offer are seriously flawed.”
 
But Bernanke explained that, except in extreme cases, the Federal Reserve operates under the belief that the free market can be relied upon to solve financial crises.
 
“The Federal Reserve believes that, whenever possible, such difficulties should be addressed in private sector arrangements,” said Bernanke. “For example, by raising equity capital as many firms have done, by negotiations leading to a merger or acquisitions, or by an orderly wind down.”
 
“Government assistance should be provided only when the financial system and thus the health of the broader economy are at risk,” he said. “In those cases when financial stability is threatened, however, intervention to protect the public interest may well be justified.”
 
Thornton, however, said the Fed’s actions over the last 14 months prove it does not favor a free market approach to dealing with crises.
 
“That’s just classic ‘Fed-speak,’” said Thornton. “If that were the case, he [Bernanke] would not have been dangling all these bailouts and auctions and facilities. The Federal Reserve is currently one of the main road blocks obstructing the will of the private market.”
 
Bernanke said that the Treasury will start distributing the $700 billion bailout, which was approved in a bill passed by Congress and signed by the president last Friday, sometime later this week.
 
The NABE is an association of about 2,500 professionals, who have an interest in business economics. Former Fed Chairman Alan Greenspan served as chairman of NABE during 1969 and 1970.