grimmeissen
Administrator
Join Date: 1/14/2004
Posts: 1217
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Posted: 3/14/2008 12:26:18 PM
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As the subprime mortgage and credit market crisis has unfolded over the past few months, the Federal Reserve has been in high gear attempting to calm the markets and protect the financial institutions. The overnight lending rate that the Fed charges banks for loans has dropped from 5.25% in September to 3% now. This is one of the fastest declines in the Fed Funds Rate since the dot com bust in 2001. In recent statements the Fed has said that it will be standing by to cut rates again if necessary. This is in light of the fact that most economists say we are in a period where it's access to money that is difficult, not the cost of it. Lowering the overnight rate merely makes it cheaper to obtain funding, but does not make it easier for those companies that have wasted away capital and have nothing to borrow against.
The mortgage crisis has left the Fed in a tough position. No one knows what this paper is worth because there is no market for it. Absolutely no one will buy it and it is impossible for a price tag to be placed on it. The Fed has created several new financial instruments to give them the ability to bail out banks with bad paper. The central bank is now offering Term Auction Facilities, where term loans can be secured near the overnight rate and they can be backed by the bad mortgage paper. Just this week they also introduced a new vehicle, the Term Securities Lending Facility, which will provide $200 billion worth of federal treasuries as loans to banks. These loans, of course, will be backed by the same risky mortgage paper.
Some may argue that it is too risky to allow poorly managed banks to fail. Even though these institutions have failed miserably to manage risk and protect their depositors' capital, some say that allowing them to go bust would be destructive to the overall economy. While I do agree in some way that bank failures would be tough to handle in the short term, I also believe it is an important part of a free economy to allow bad businesses to fail so that good ones can take their place. As the government and Federal Reserve step in to bailout those that were irresponsible, they will be allowed to continue business as usual and the bad elements will never be removed.
I have been against the bank bailouts since they started, but more recent developments have discouraged me even further. This morning JPMorgan Chase and the Federal Reserve have announced a bailout plan that is targeted at the investment firm Bear Stearns. JPMorgan is a bank, and thus has access to the Fed overnight lending window for taking care of its liquidity problems. Bear Stearns, as a Wall Street investment house, does not have this access. Instead, JPMorgan has agreed to make a loan to Bear Stearns with that company's bad paper as collateral, and in turn they will use their power to borrow from the Fed to give Bear Stearns a cash infusion. In essence, the Federal Reserve has now opened its doors to taking on bad mortgage paper from investment houses that are not even a part of the banking industry.
If the hedge funds on Wall Street don't even have to account for their investment mistakes, who does? The Federal Reserve has stooped to a new low in managing the dollar. They are perfectly happy to watch gas prices and food prices shoot through the roof for most of the country as long as the rich guys in New York don't lose their billions.
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mccracken
VIP Member
Join Date: 1/16/2004
Posts: 262
Location: USA
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Posted: 3/20/2008 2:56:26 PM
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It's all about the short term economics. People always think that they can put off pain for tomorrow. When tomorrow comes, they put off a bigger pain for the next day.
It's completly disgusting that my gas and groceries are more expensive, because people took out more than they could pay--and because banks, who always take out 10% more than they can pay, need bailed out.
Check it out.. check it out... and then pick it out....... Then show me my dinero!!!
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grimmeissen
Administrator
Join Date: 1/14/2004
Posts: 1217
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Posted: 3/21/2008 2:47:44 PM
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The Fed is not even going to use this facade to get around the rules anymore. Since the JPMorgan/Bear Stearns bailout, they've decided to just go ahead and open the discount window to brokerage houses directly.
Wouldn't you love it if you could start a business, make as many wild bets as possible while running up debt, and always have a backstop to provide cash if you get into trouble? I don't even like bailing out banks, let alone investment bankers.
It's obvious our leaders want free markets to protect profits, but socialism to protect against losses.
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mccracken
VIP Member
Join Date: 1/16/2004
Posts: 262
Location: USA
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Posted: 3/26/2008 7:15:29 AM
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All this business bailout stuff reminds me of the social devolution that we're currently undergoing. No longer are the weak, stupid, and irresponsible being weeded out; now, no matter what mistakes you make there is a safety net.
They started doing this with people a while ago, but I guess they figured they'd extend the net to businesses as well.
Check it out.. check it out... and then pick it out....... Then show me my dinero!!!
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