This is the Cato Daily Podcast for Friday, April 4, 2008. I'm Kila Brown.

What role should the Fed play in bailing out banks?

Cato Institute Senior Fellow Gerald P. Odrysskall should the Fed play in bailing out banks.

Cato Institute Senior Fellow Gerald P. O'Driscoll, former Vice President at both the Federal

Reserve Bank of Dallas and Citigroup, says the Fed, in its role as Central Banker, is moving

into uncharted territory.

There is a belief that this broker activity engaged in by the Fed is perhaps appropriate because the

moral hazard issue associated with Bear Stearns had essentially been done away with by the precipitous decline of the company's

share price.

Do you agree with that?

Partly.

I mean, it's very difficult to second guess, a central bank that's engaged in a lender of last resort activity because presumably at least at the moment they're doing it they have some information that's not generally available

and they also have limited options but uh... that deal the way it was done

uh... was very reminiscent of long-term capital management in 1998

where there was a willing second bidder that somehow got pushed out

and uh... in in favor of of a bid that was well in that case it was more favorable to the

shareholders of LTCM but it was fed involvement picking who was going to get the company and at what price

and that begins to look like crony capitalism it's something we criticize a lot

when government institutions do this in other countries.

And also the Fed has this position of being partly public and partly private, a bankers' bank,

but also a governmental institution.

And in what role were they acting if they were acting as a governmental

...