Friday, August 17, 2007

Federal Reserve Pushes Debt in Conference Call to Banks

Federal Reserve Chairman Ben Bernanke reduces himself to an "easy money" telemarketer to push more debt onto the economy.

Did Bernanke remember to call when the banks were in the middle of dinner?

The Fed claims that it is pumping cash into the markets only because they need it for normal operations. However, if the markets truly needed extra money, they would not need a hard-sell telemarketing call from the Fed to get them to use the discount window (from which the Fed loans directly to financial institutions).

Is Fed policy a "solution" in search of a problem?

Investors first need to assess accurate asset value and the markets are trying to repair the misinformation of pricing that the Fed's loose monetary policy instigated. Yes, while Congress is running around like a chicken with its head cut off to dream up new regulations, the markets are trying to self-regulate for the simple reason that bad loans can lose money--except that the government (Fed and certain politicians) keeps trying to push the markets back into the same, bad decisions.

Fed Policy: When you are too far in debt, borrow more.

"Fed officials know the discount window action will only be effective if banks either use it, or the knowledge of its availability, to expand their own lending to high-quality counterparties such as high quality mortgage borrowers" (WSJ) (italics added).
The Fed apparently wants the discount-window's easy cash and its promise as a future bailout to encourage banks to go back out on a limb at the new, more indebted level. People who argue that the discount window's loans are limited overlook this ripple effect of relying on the promise of Fed money to "free up" and then "max out" lending of non-Fed money. It is the difference between handing credit cards to your teenagers, and handing credit cards to your teenagers while telling them not to worry if they go over their limits and cannot make their payments.

The Fed's "Refinance Now! Our records indicate that you qualify for our special rates!" telemarketing is a bad precedent. Is there any way that we can get the banks on a "Do Not Call" list?

Hat Tip: Calculated Risk

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