when the wall street becomes the mean street

“This is unique, and the Fed has never done something like this before,” said Allan Meltzer, a professor of economics at Carnegie-Mellon University and author of a sweeping history of the Federal Reserve. “If you go all the way back to 1921, when farms were failing and Congress was leaning on the Fed to bail them out, the Fed always said ‘It’s not our business.’ It never regarded itself as an all-purpose agency.”

The investor of the last resort, that's a new role for the Federal Reserve, NYT's article claims. 

The report says 'the Treasury Department sold tens of billions of dollars of special “supplementary” Treasury bills on Wednesday to provide the Fed with extra cash. The Treasury sold $40 billion of the new securities on Wednesday morning and will sell $60 billion more on Thursday. More money-raising is sure to follow.' 

Who are the buyers of those special supplementary treasury bills? China, or some Middle East countries? Why they are not specified? 

Rosa Brooks, the columnist in L.A. Times, gives some clue in her quite self-deprecating essay,

'Last week -- even before Wall Street's latest collapse -- 13 former finance ministers convened at the University of Virginia and agreed that America must fix its "broken financial system." Australia's Peter Costello noted that lately America has been "exporting instability" in world markets, and Yashwant Sinha, former finance minister of India, concluded, "The time has come. The U.S. should accept some monitoring by the IMF.' 

According to this local report, the summit was led by former U.S. Treasury Secretary John W. Snow, and the attendants included the former finance ministers from Iraq, South Korea, Germany, Afghanistan, Kuwait, Canada, Brazil, Spain, China, India and Italy. 

WSJ has calculated in this article that 'the Fed has committed some $380 billion of its $888 billion in assets to these mortgage rescue operations. That's nearly half. And yesterday the Treasury announced it will issue new debt to lend to the Fed, not merely to fund government operations.' It offers some solutions for the Fed to maintain independent and to stop serial nationalizations. 

Zachary Karabell invents a new word 'Chimerica' to describe how the US and China became one. Although his book on the subject will only be available next year, he nevertheless uses AIG case to illustrate the convergence. 

'In the interim, there will almost certainly be a wave of regulations designed to prevent the flood that has already occurred, some of which are likely to trigger another crisis down the line. Until we can have a more rational, measured public discussion about what government and regulations can and should do vis-à-vis financial markets, we are unlikely to break the cycle.'  

What kind of cycle is it? Let's review some golden rules that Hayek, the father of economic neo-liberalism, said nearly 50 years ago: 

'First, it seems that certain that we shall not stop the drift toward more and more state control unless we stop the inflationary trend; and second, any continued rise in prices is dangerous because, once we begin to rely on its stimulating effect, we shall be committed to a course that will leave us no choice but that between more inflation, on the one hand, and paying for our mistake by a recession or depression, on the other.' 

What would happen to US then? In the foreseeable future, the inflation will become worse. Instead of encouraging more saving, it will discourage saving. The size of the middle class will shrink further, and the gap between the rich and the pool will be widened. The worst thing probably is, starting from the Fed's intervention with the financial market, the US as a free world will enter into the vicious circle 'wherein one kind of government action makes more and more government control necessary', as what Hayek says. 

It is an irony indeed, as what Mr. Karabell says, that 'AIG was founded in Shanghai in 1919, when China was emerging from millennia of imperial rule. Over the next century, China turned away from capitalism. Almost 90 years later, AIG is now being taken over by the U.S. government just as the Chinese government is moving as quickly as possible to divest itself of control of major companies'. 

When worse comes to the worst...