THE BEST WAY TO UNDERSTAND THE GLOBAL FINANCIAL SYSTEM 177
long and the short — would converge. Well, they didn’t con-
verge; they diverged. They widened. The more the panic grew,
the worse the spreads widened and the more money we lost.
We were heading for a complete crackup until Wall Street
injected the $4 billion in. They didn’t do that to bail us out.
They were bailing out themselves. They were, in effect, buy-
ing our balance sheets so that they didn’t have to suffer the
defaults, which would have happened if the company had
actually filed for bankruptcy.
That’s true of most bailouts. The people putting up the
money are not doing a charitable act. They’re really protecting
their own interests because they’re on the other side of some
trade that they don’t want to see go down.
The lesson is simple. Don’t underestimate the power of
contagion.■ 6 Major Flaws in the Fed’s Economic Models
For now, the U.S. dollar is the dominant global reserve cur-
rency. All markets, including stocks; bonds, commodities, and
foreign exchange are affected by the value of the dollar.
The value of the dollar, in effect, its “price”, is determined
by interest rates. When the Federal Reserve manipulates inter-
est rates, it is manipulating, and therefore distorting, every
market in the world.
The Fed may have some legitimate role as an emergency
lender of last resort and as a force to use liquidity to maintain
price stability. But, the lender of last resort function has morphed
into an all-purpose bailout facility, and the liquidity function has
morphed into massive manipulation of interest rates.
The original sin with regard to Fed powers was the
Humphrey-Hawkins Full Employment Act of 1978 signed by
President Carter. This created the “dual mandate” which al-
lowed the Fed to consider employment as well as price sta-