The Fed’s Dealings: For Public or Private Interest?

Ferguson is professor of political science at the University of Massachusetts, Boston. He is the author or coauthor of many books and articles, including Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems (University of Chicago Press).

Johnson was previously a managing director at Soros Fund Management, where he managed a global currency, bond and equity portfolio specializing in emerging markets. He served as chief economist of the U.S. Senate Banking Committee under the leadership of Chairman William Proxmire and before that as senior economist of the U.S. Senate Budget Committee under the leadership of Chairman Pete Domenici.

Ferguson and Johnson recently wrote the piece “Britney and the Bear: Who Says You Can’t Get Good Help Anymore?” The piece states: “It is high time for someone to start raising questions about the public interest here. … Since the first deal was announced, J.P. Morgan Chase’s stock has rallied smartly. With its enormous market capitalization, that translates into a gigantic increase in market value. If the deal unravels, the stock price might — indeed, almost certainly will — fall again, but that is precisely our point: markets considered the deal that the Fed and Morgan tried to cut a very good one for Morgan.

“The question that needs to be asked is why none of that increase in value is ever to flow back to the public, whose money is critical to the deal. This would be easy to arrange and it does not risk reviving the Soviet Union’s Gosplan: the Fed or the federal government could simply have taken some stock in J.P. Morgan Chase. Or, as in the Chrysler bailout, there could have been warrants issued, guaranteeing the government the right to buy stock at a low price. At some point in the future, when J.P. Morgan Chase’s management and investors are again comfortable lecturing the rest of us about the magic of the marketplace and the urgent need to cut the size of government, the stock or the warrants could be sold off or redeemed, to pay for the rescue.”

For more information, contact at the Institute for Public Accuracy:
Sam Husseini, (202) 347-0020; or David Zupan, (541) 484-9167

THOMAS FERGUSON
ROBERT A. JOHNSON
IPA

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