The Fearsome Fed: Like Jason, the Federal Reserve is an unholy terror with an affinity for Friday the 13th

Originally Published In:

Fairfield County Weekly (3/5/09) Link, Hartford Advocate (3/5/09) Link, New Haven Advocate (3/5/09) Link

2009 will be the first calendar year in a long time to include three Friday the 13ths. We had our first in February, we're due for a second next week, and the third will come in November.

The last time this happened? 1998.

People speak of the recent financial turmoil as "much worse than 1998." That year brought a default on domestic debt by a large sovereign nation (Russia), leading to massive losses for a hedge fund, Long Term Capital Management. LTCM was eventually bailed out by a consortium of banks in a meeting hosted by the Federal Reserve.

Perhaps that meeting planted the seeds in the mind of every banker that they, too, would be bailed out if need be. So why not take more risks? Best case: You get a bonus. Worst case: The Federal Reserve bails you out (and you may get to keep your bonus).

The second most recent year with three Friday the 13ths was 1987.

On Oct. 19, 1987, the stock market fell about 20 percent, still the largest single-day percentage drop in history. What was the reaction of the Fed then? Before the markets opened the next day, they issued a public proclamation: "The Federal Reserve, consistent with its responsibilities as the Nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system."

And "support" they did. They conducted "more expansive market operations at earlier-than-usual times." They "temporarily liberalized the rules governing the lending of Treasury securities from its portfolio."

And they were quite pleased with themselves. All those quotes above are from a 2006 working paper by the Federal Reserve reflecting on the crash and their own actions. "[Our] response was well received and was seen as important in helping financial markets return to more normal functioning," the paper says. Indeed, they suggest the day after the crash was an up day because of them.

So what did investors learn in 1987? If things go bad, the Fed will step in, even in the stock market. Don't worry!

And the last year before 1987 to have Friday the 13ths in February, March, and November? None other than 1981, which, at the time, saw the worst recession since the Great Depression. The inflation rate was in double digits. Again, the Federal Reserve reared its ugly head. They tried to stop inflation by raising the overnight rate to 20 percent in June of 1981, from half that amount two years earlier. It didn't help — unemployment skyrocketed to nearly 11 percent — but it didn't matter. That was what the Fed was established to do, and the people would pay for the mistakes.

Think now of the chronology in the correct order. The 1981 recession showcased the Fed doing what is was mandated to do: fiddling with interest rates. And we saw it didn't help. Arguably, manipulating interest rates only exacerbates the problems. The 1987 crash subtly changed the role of the Fed. It turns out they don't just do arcane currency and bond transactions behind closed doors: They are an important and material participant in the stock market itself. Who knew? In 1998, we learned they will help organize a private bailout of a single hedge fund — such is their fear of "systemic collapse" and such is their power.

And what did we learn in 2009? The Fed has spent trillions of dollars in liquidity programs, lending money to banks, recategorizing brokerages as banks and essentially holding bad assets — all without any Congressional or other oversight or approval.

Perhaps it's not paraskavedekatriaphobia, the Greek-sounding fear of Friday the 13th, that you should adopt. Perhaps the right fear is fedophobia.

Last year, at a finance conference, I asked an assembled panel of Federal Reserve employees if they had any data, any at all, that the Fed itself was a good thing, that it helped the economy rather than hurt it, that it should continue to exist.

They had nothing.