By extending its lender of last resort facility to non-banks, the Federal Reserve has broken new ground.  And in exchange for its support, it seems to be only reasonable that the broker-dealers who now have access to the Fed’s
largesse become more accountable to the Fed under is regulatory/supervision function. 

Treasury Secretary Paulson who appears to be resisting calls for a greater role of the Federal government, instead relying on voluntary measures and reversing his prior opposition to increasing the role of the government-sponsored agencies like Fannie Mae and Freddie Mac.  Today Paulson was explicit.  He not only endorses the Fed’s actions (no big surprise there), but seemed to recognize the new to reform the regulatory environment, including acknowledging that discount window facilities require the Fed’s supervision.  This could be simply shifting some of the gulatory/supervision responsibility from the SEC to the Fed. 

The lament expressed by the FT Economics Editor Martin Wolf that the outcome of the financial crisis will be more regulation and that the Fed’s action are “moral hazard made visible” and apparently echoed by some Senators seems
misplaced.  Even with an improved share price, does any one really think Bear Stearns owners or employees have been bailed out ?  Bear’s customers/counterparties may have been, but not Bear itself.  Just as firemen
don’t give lectures on the dangers of playing with matches as a housing is burning down, academics/journalists like Wolf and Senators caught up in the electoral cycle have the luxury to worry about moral hazard, but policy makers
themselves have a duty to protect the overall system. 

Some of these purists seem to see these steps as what Hayek called the “road to serfdom”, but the US housing market has not been a laizze faire exercise in the US at least since the Homestead Act in the middle of the 19th century and
ironically, this is the 75th anniversary of the New Deal, which saw the birth of FHLB.  The US government has had a significant presence in the US housing market ever since.  Moreover, the Federal Reserve was created in a
large measure to what were perceived as market failures--especially in the circuit of capital.

Wolf argues that the “rescue of Bear Stearns marks liberalization limit [sic].  He says, “ Remeber Friday March 14, 2008: it was the day the dream of global freemarekt cpaital died.” Really ?  Where has he been ?  Surely the US and other countries found the limit to the deregulatory regime and the Reagan-Thatcher revolution long before this month.  Just like strong fences make good neighbors, markets work best when their is a strong regulatory environment.  This is not a leftist stance.  Look at the speeches by good capitalists like Alan Greenspan, Robert Rubin and Lawrence Summers about the lessons they drew from the Asian financial crisis a decade ago.  They all defend a strong transparent regulatory regime.