- The Washington Times - Sunday, August 12, 2007

Misguided foreign policy

The article “Olmert, Abbas confer in Jericho” (Foreign, Tuesday) covering the meeting between Israeli Prime Minister Ehud Olmert and Palestinian Authority President Mahmoud Abbas in Jericho — a town controlled by the Palestinian Authority, but of tremendous historical and religious significance to Jews — describes the surrender of Mr. Olmert to the demands not only of Mr. Abbas but a misdirected State Department foreign policy. The discussions included the surrender of the West Bank to the Palestinian Authority with the removal of 250,000 Israelis from that area, the subdividing of Jerusalem with the Arab section including a Jewish majority and the right of return of the descendants of Arabs displaced during the Arab wars to destroy Israel.

Only fleeting mention is made of the obligations of the Palestinian Authority under the proposed settlement, with the main themes being opening checkpoints to allow Arab terrorists to enter Israel, the transfer of funds to Mr. Abbas and a momentary discussion of security. The State Department continues its flawed policy in this region.


Silver Spring

The Fed’s priorities

Thank you for the informative editorial (“No Fed bailout,” Tuesday) regarding the current credit crisis and its subsequent impact on financial markets. The smart editorial balances all the contradictory attributes from weak growth to an accelerated consumer price index. My concern is that while the economic analysis is sound the editorial failed to acknowledge the structural changes our economy has produced as a result of the U.S. Federal Reserve establishing a 2002-2003 sustained low-interest-rate policy.

The editorial fails to recognize how sustained low interest rates in 2002 2003 became the catalyst for the explosive growth of hedge funds. PerTrac Analytical Platform survey in March 2007 identified well over 4,000 hedge funds with single fund managers accounting for over $1.41 trillion under management with 250 funds surpassing $1 billion mark alone.

From the stock-market crash in 1987 to the bailout of Long Term Capital Management in 1998, former Fed Chairman Alan Greenspan often assured global markets that the Fed would provide enough money to keep financial markets functioning. As a result, interest rates edged lower, markets recovered and corrections became but a pause in a bull market.

In 1998, during the Long Term Capital debacle, there were approximately 400 500 hedge funds with over 40 U.S. primary broker dealers prepared to buy back securities in the event of a selloff. It only took one heavily leveraged hedge fund liquidating $130 billion of securities to seize Wall Street’s primary broker dealer community. Today, as a result of several large mergers, there are only 21 U.S. primary broker dealers servicing thousands of hedge funds while the Fed has raised the Fed Funds rate 17 consecutive times.

Thus Steven Rattner’s concerns are not misplaced. The coming market dislocation will not be relegated to the housing market alone. The Federal Reserve’s singular focus on inflation at the expense ofrecognizing new structural imbalances could quite possibly tip the technical balance that supports the sensitive relationship between hedge funds and the global financial service, creating a severe market dislocation.

I also challenge The Times’ assertion that the Fed can only maintain its credibility by maintaining current interest-rate levels. By deciding to leave current interest rates unchanged on Tuesday, the Federal Reserve set two new precedents. First, it signalled that it bails out exclusive hedge funds when they err, but not the overextended taxpaying homeowner. Second, the Federal Reserve failed to understand how its low-interest-rate policies from 2002 2003 resulted in the explosive growth of hedge funds and the unintended structural imbalances they fostered in the global financial markets.

How do The Washington Times and the Federal Reserve define “moral hazard”?


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