Bailing out Wall Street

US Federal Reserve vice chairman Donald L Kohn has floated the idea of giving Wall Street securities firms permanent access to Federal Reserve loans conditional on imposing greater regulatory oversight. While temporary Fed lending to these firms helped stabilize markets during the subprime meltdown, longer-term moral hazard has been established by creating expectations that both the Wall Street banks and primary securities deals may rely in the future on big Fed bailouts.

Federal supervision of the large New York banks failed to curtail abuses of structured investment vehicles, credit default swaps, and other highly engineered products that caused the crisis. No one should expect that extending the same regulatory oversight to the primary dealers in US government securities would have any greater effect on their conduct than it has had on US banks.