A Bailout for Investors? Good.

Here's a question for all those carping about how the Federal Reserve, in offering to pump cash into the financial system last week, was bailing out lenders and investors from the full consequences of their bad decisions:

Why have a central bank, if not to do precisely that?

The original purpose of the Fed was not to try to manage the ups and downs of the business cycles or prevent the outbreak of inflation, though those have become the central focus in decades since World War II.

Rather, it was for the government to step in when investors and lenders get so fearful that they begin to pull back from making even sound loans and investments, draining from the economy the credit that is its lifeblood. That's what happened during a series of financial panics in the late 19th and early 20th centuries. And it was to prevent a recurrence of those panics that the Fed was created.

I suppose you could argue that the Fed didn't need to step in this time -- that this wasn't a full-blown financial panic but merely a repricing of risk and assets that, while messy and a bit irrational, would have sorted itself out on its own.

But that was a judgment call Bernanke & Co. were in the best position to make. And surely even a casual observer could have noted that the freeze-up in credit had already extended well beyond those holding bad mortgage loans and was seriously affecting the availability of new credit to homeowners, businesses, investors and financial institutions just to do what they normally do.

It requires a truly puritanical mind to believe that the only way to mete out the requisite punishment for past financial sins and discourage excess in the future is to deny credit to these new borrowers and, in the process, drag the global economy into recession. It is the economics not of Adam Smith or Joseph Schumpeter, but of Cotton Mather.