“Whatever claims might be made about the uniqueness of current circumstances, it seems inevitable that the nature of the Fed’s response will be taken into account and be anticipated, by officials and market participants alike, in similar future circumstances,” Volcker said in prepared testimony before Congress.

This from The Wall Street Journal:

Volcker hinted at the Fed’s recent role facilitating the rescue and proposed takeover of Bear Stearns by J.P. Morgan Chase. The Fed, he said, “felt it necessary to extend that safety net” to systemically important institutions by “providing direct support for one important investment bank experiencing a devastating run, and then potentially extending such support to other investment banks that appeared vulnerable [to] speculative attack,” Volcker said.

“Hence, the natural corollary is that systemically important investment banks should be regulated and supervised along at least the basic lines appropriate for commercial banks that they closely resemble in key respects,” he said.

Still, he stopped short of criticizing the Fed’s response to the Bear Stearns collapse. “I can understand why they felt they had to act,” Volcker said.

He said heavily “engineered” financial markets, using sophisticated mathematical models, led to “enormous complexity” and “opaqueness” in markets.

“Volcker cast out the devil of inflation during his term [as head of the Fed],” says Bill Bonner in The Daily Reckoning.

“Thus interest rates could come down. Thus, began a quarter century of falling interest rates and increasingly accessible credit. This eventually produced the absurd and pernicious consequences we describe here in the Daily Reckoning. Just as teenaged kissing leads to petting…which leads to…well, you know how it works, dear reader…success leads to complacency which leads to excess. But the long bull market in bonds (bonds go up when interest rates go down) also vastly increased the supply of capital available for new industries…and caused an explosion in output capacity.”

There’s a hold up in the Bronx,
Brooklyn’s broken out in fights.
There’s a traffic jam in Harlem
That’s backed up to Jackson Heights.
There’s a scout troop short a child,
Khruschev’s due at Idlewild
Car 54, Where Are You?

Yes, crises abound for this modern-day Toody and Muldoon of the finance world. But it’s their own fault; former academic Ben Bernanke and lifelong government apparatchik Timothy Geithner have opened up a Pandora’s Box with the Bear Stearns bailout.

Sen. Chris Dodd (D-Conn.) recently pushed for help to re-liquefy the student loan market, but according to Bloomberg, that’s just the beginning:

Former Fed officials andother Fed-watchers say that Bernanke’s actions in saving Bear Stearns will expose the central bank to continuing pressure touse its $889 billion balance sheet to prop up companies or entire industries deemed important by politicians. The Fed satisfied Dodd’s request today, expanding the swaps to include securities backed by student debt.

Former St. Louis Fed chief William Poole cites Fannie Mae as a likely next candidate. And traders are betting on still others back in the investment-banking sector:

The cost of default protection on Merrill Lynch & Co. debt fell to 1.4 percentage point by April 30 from 3.3 percentage points on March 14, CMA Datavision’s credit-default swaps prices show. The cost of protection on Lehman Brothers Holdings Inc. securities has fallen to 1.5 percentage points from 4.5 percentage points over the same period.

No wonder Anna Schwartz, Milton Friedman’s collaborator on “A Monetary History of the United States,” calls the Bear bailout a “rogue operation” that the Fed had no business conducting. But it’s too late now. The Fed is fueling expectations of more and bigger bailouts. It can’t end well.

According to a report in The Wall Street Journal, the mortgage lender is close to a deal to get a $5 billion injection from TPG and other investors — a deal not brokered by the government, as was the recent Bear Stearns bailout.

The deal seen by some analysts as a sign that the financial sector is starting to pull out of the credit crisis.

According to Dow Jones MarketWatch: “S&P 500 futures rose 11.6 points to 1,383.50 and Nasdaq 100 futures up 14.75 points to 1,884.50. Dow industrial futures rose 69 points.”

Is Wall Street now safe for investors?

“There are three key signs that tell if Wall Street is safe for investors”, says Martin Hutchinson. Click on the following link find out if the credit crunch is really over.

While you’ll find many commentators labeling the credit crisis as one of liquidity, I’m adamant that it’s more of a crisis of confidence, says Karim Rahemtulla.

“Here’s what many rookies don’t understand: the huge dips that we’ve seen in the market — especially in some of the financial sector stocks — have presented great opportunities to buy, not sell.”