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Task facing Bernanke, Paulson grows bigger, more urgent

Every August, senior officials of the Federal Reserve System and about 100 invitation-only guests gather like monks on a retreat held at a Wyoming lodge inside the gorgeous Grand Teton National Park near Jackson Hole.

Imagine a mix of high-end discourse on the global financial system and communing with Mother Nature in one of the more scenic spots in the country.

Wags used to call it Camp Fed. For those wishing a return invite, it is best to refer to it as a symposium. This year's topic — no surprise here — is "financial stability."

When I first attended long ago, Federal Reserve Board Chairman Paul Volcker presided and spoke about the important issues of the early 1980s: inflation (far worse than we're dealing with now), interest rates (far higher than we face), and a U.S. economy whose unemployment rate was nastier than today's.

Somehow we all survived. Still, I suspect Volcker has no desire to swap places with Ben Bernanke. The current Fed chairman's top task — stabilizing an unruly Wall Street and fixing a financial machine built to let people invest confidently and purchase houses with affordable mortgages — is a tough one.

In Wyoming, Bernanke spoke in the Fed's classic style of obfuscation, endorsing "macroprudential" regulation. It's his way of saying he wants the Fed to have more power to control a broader swath of the U.S. financial system.

Bernanke, along with Treasury Secretary Henry Paulson, must feel like little Dutch boys jamming their fingers in an increasingly leaky dike. The holes and drips are growing in number:

• Fannie Mae and Freddie Mac, the teetering twin towers that connect the local home mortgage to the global investor, are all but assured of receiving a major federal bailout.

• Wall Street's historic Lehman Brothers is rapidly losing the confidence of the broader market and may end up like investment firm Bear Stearns: rudely shoved into the arms of a bigger bank buoyed with federal backing.

• Giant U.S. banking firms — Citigroup, Merrill Lynch and Wachovia among them — considered "too big to fail" are struggling from bad lending and investment decisions. Citigroup, especially, has been forced to search globally for investors to help recapitalize. One result has been a sharp uptick in Middle Eastern money and influence in what is the nation's largest banking company.

• "Complex financial instruments" used to mean things like "derivatives" or "collateralized mortgage obligations." How quaint. An explosion of new financial creations spurred by hedge funds, global traders and other players spawned poorly understood and regulated things like credit swap default markets and auction-rate securities.

The trend line? Increasing involvement by the federal government to bail firms out and provide liquidity (to supply cash when only cash will do). Pushing stronger companies to absorb the weaker. And modernizing a creaky police force of regulators.

It's all long overdue. Anyone and everyone who has a pension, a mortgage, a credit card, a car loan, a bond or a mutual fund wants to depend on a financial system that says what it does and does what it says.

In Wyoming, Bernanke called the mission "strengthening the infrastructure."

It's also called rebuilding confidence in the system.

We're not there quite yet.

Robert Trigaux can be reached at [email protected]

Task facing Bernanke, Paulson grows bigger, more urgent 08/23/08 [Last modified: Thursday, August 28, 2008 2:05pm]
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