Moral Hazard Now Run Amock

Fascinating story on Bloomberg this weekend; remember the little discussed action Friday? [May 2: Employment Report and more Fed Actions] How the Federal Reserve is now willing to take bonds backed by auto loans, student loans and credit cards? (Folks, a year ago discussion of such actions would of been laughed off, now they go on without even any consternation)... well it appears the backstory is very interesting. The precedent was set with Bear Stearns and we have written , the rest of the private and public sectors will now be expecting handouts left and right - some have even gone out and said so [Mar 25: Wells Fargo Indicates it would Love to be Forced into a Shotgun Marriage] We have a complete and utter nanny state now - where risk can be ignored (any wonder the stock market rockets off this stuff?), and continued priming of the monetary system is going to lead to help lead (along with actions of the Congressional branch) the complete whipping of the US dollar. Fascinating stuff, and items you won't find discussed almost anywhere (sadly)

• A month after the Federal Reserve rescued Bear Stearns Cos. from bankruptcy, Chairman Ben S. Bernanke got an S.O.S. from Congress. There is ``a potential crisis in the student-loan market'' requiring ``similar bold action,'' Chairman Christopher Dodd of Connecticut and six other Democrats wrote Bernanke. They want the Fed to swap Treasury notes for bonds backed by student loans. In a separate letter, Pennsylvania Democratic Representative Paul Kanjorski and 31 House members said they want Bernanke to channel money directly to education-finance firms.
• Student loans are just the start. Former Fed officials and other Fed-watchers say that Bernanke's actions in saving Bear Stearns will expose the central bank to continuing pressure to use 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.
• ``It is appalling where we are right now,'' former St. Louis Fed President William Poole, who retired in March, said in an interview. The Fed has introduced ``a backstop for the entire financial system.'' Critics argue that the result will be to foster greater risk-taking among investors emboldened by the belief that the government will bail them out of bad decisions.
• There are already indications that investors perceive the safety net to be widening as a result of the actions by Bernanke, 54, and New York Fed President Timothy Geithner. ``The market understood that this is the method by which Fannie Mae and Freddie Mac could be bailed out if necessary,'' Poole said.
• ``There is no way to put the genie back in the bottle,'' Minneapolis Fed President Gary Stern said in an interview with Fox Business Network on April 18. ``What worries me most about where we wind up is that we will have an expansion of the safety net without adequate incentives to contain it.''
• The risk to the Fed is that it is routinely asked to step in and support insolvent companies whose creditors are on the run, economists say. Whatever regulations and incentives the Fed tries to put in place now would be evaded by the market's innovation of new types of products, Goodfriend said in an interview. Investors would nonetheless still count on the safety net, he added.
• ``That's the consequence of crossing a line that had been well established for three- quarters of a century.''

Again, realize the historic steps being taken so that you, my dear friend, can return an extra 8% in your Etrade account. Billions upon billions of new compensation for industry insiders... an extra 8% for you (along with inflation stoking) and an inherent promise that everything is now backstopped by your tax dollars.

The most innovate, stable, transparent financial system on Earth. What a crock.