As crisis deepens, Fed steps up role

The collapse of Bear Stearns sends the central bank scrambling to ease fears.

By Ron Scherer Staff writer of The Christian Science Monitor
from the March 18, 2008 edition

In the wake of the collapse of Bear Stearns, a top investment bank, the Federal Reserve is struggling to reestablish confidence in America's financial system.
The US central bank is guaranteeing loans, taking questionable loans off the books of banks, and dropping interest rates at a near-record pace. Despite the Fed's efforts, the credit markets remain wary. Most economists agree that the Fed has now moved from crisis prevention to crisis management, trying to limit any cascading effect from problems on Wall Street.

More home foreclosures?

The risk of the economy not responding to the Fed's stimulus is daunting, Gramley says. With banks continuing to tighten credit standards, he worries the housing market will sink further. "Foreclosures will continue to rise, and home prices will be further depressed, and since homes are the underlying collateral for many loans, the problem becomes worse," he says. "This will require innovative thinking."

In fact, some Fed watchers worry that more is being done for Bear Stearns than homeowners. "Of all the investment houses, Bear Stearns was the one most deserving of going under because of the subprime crisis, both for its ownership of a subprime lender and its work packaging those loans," e-mails Kurt Eggert, a law professor at the School of Law at Chapman University in Orange, Calif., and a former member of the Federal Reserve Board's Consumer Advisory Council. "The Feds are doing more to help Bear Stearns than the borrowers facing foreclosure because of Bear Stearns's actions."