Holy crap. The Fed does in fact sneeze at numbers in the hundreds of billions. Hoping to give the markets a one-two punch, they announced another huge waste of taxpayer money today. Bloomberg reports, Fed Commits $800 Billion More to Unfreeze Lending:
The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.
The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.
With today’s announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers are aiming to prevent a financial collapse and stamp out the threat of deflation.
“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”
“Large amount of credit risk.” Seriously? That must be the solution to too many banks taking large amounts of credit risk… in BIZARRO WORLD. The markets are about to have their first three day rally since September 10-12. Apparently Wall St. is applauding the use of taxpayer money to prop up asset prices.
The article actually has many details, so read the whole thing if you are interested in the details of this cluster f_ck. There are only a couple points I think are worth discussing.
For those lawmakers that supported the TARP program, this can only be taken as evidence that they didn’t need to do anything. Treasury hasn’t done anything that lawmakers wanted with the TARP funds, and the Fed has responded with the exact same plan (plus $100 billion), using authority it was supposedly granted (at least discussed) six years ago. Unfortunately, we’ll probably see no measurable improvement in lending result from this. Economic fundamentals continue to decline. There is a provision for the loans to be “new or recent,” so it’s my guess that this actually will slow some of the decline in lending. Prolonging the downturn/recovery might be good news for those barely hanging on, but it’s bad news for those who’ve already gone over the edge.
The second point is that demand for treasuries may be huge, but it is finite. I’m concerned that the Obama administration is going to try a huge stimulus package that runs out of funding due to a waning appetite for treasuries. I want to be clear, I hate the idea of having the government try to prop up the economy by spending money it doesn’t have. That said, that’s the plan going forward, so it behooves us to find the best way to fund it. I’d like to see someone research this idea: have the government fund as much as they can with treasuries early on, gradually switching over to (current) taxpayer funds as yields rise. This is a departure from current borrowing strategies used by the government, which attempts to spread borrowing across the year based on projected shortfalls.
Aside
Most of my friends are fiscally conservative Democrats. A few are fiscally conservative Republicans. A couple are Democrats that do embrace the ideas of Keynesian economics (government deficit spending to create jobs in downturns). But I don’t personally know any Republicans that endorse this type of government spending. Where did the fiscally reckless Republican come from? Where did this administration come from? That’s a rhetorical question, of course. Bush’s approval rating indicates that Democrats and Republicans uniformly can’t stand his policies.
