Geithner's plan to open the Fed's discount window for the first time to non-banks stunned the financial community but received little attention from a Congress in recess, including presidential candidates preoccupied by Iraq. John McCain was traveling in Iraq, while Hillary Clinton and Barack Obama exchanged barbs over who was more antiwar. An influential statement of support for the bailout came from Sen. Charles Schumer, who heads both the Joint Economic Committee of Congress and the Democratic Senatorial Campaign Committee. Although Schumer is not known for non-partisanship, he is a New Yorker who is close to the securities industry.
The reaction in the hinterland was far less favorable. The Washington office of the Independent Community Bankers of America was flooded this week by its members across the country complaining of discriminatory favoritism toward their big city brethren. If they had blundered into financial failure, the community banks complained, they would not be bailed out, but instead investigated and prosecuted. "Too big to fail," therefore, becomes "too big to be punished."
The expense of such an intervention is not a problem because the Fed, unlike the president and Congress, can print money. The Bear Stearns bailout, approved in private by unelected officials, contributes to paranoid grievances on the left and right that built support for Ron Paul's presidential candidacy. A Fed official conceded privately this week that "we may have crossed a line" in jumping into Bear Stearns -- and that is an understatement. There is no doubt the American economy is in uncharted territory, with reverberations that cannot be forecast.