Wednesday, July 30, 2008

Federal Reserve Continues Its Historic Actions

Not a surprise but the Federal Reserve is going to continue its corporate welfare - i.e. "exchange the banks junk for US Treasuries" program, and is now adding very long term loans (3 months instead of 1 month) for the commercial banks. So we continue to exchange lower grade mortgages, auto loans, credit card loans, student loans - just about anything, and trade it for US Treasuries. So the junk sits on the balance sheet of the US Taxpayer and the liquid Treasuries go to the banks. It's good to be a bank CEO - too bad they screw it up with greed once every 8-10 years and send the economy into recession. And we wonder why they continue to take such outsized risks? Because we cannot let them fail. At least the big guys. And sometime in December I am sure they will say - well we are extending this junk for Treasury program out again to summer 2009... despite the "1st half 2009 recovery".
  • The Federal Reserve said Wednesday it is extending its emergency borrowing program to Wall Street firms and is taking other steps to ease a severe credit crunch that has hobbled the national economy.
  • The Fed said the program, where investment houses can tap the central bank for a quick source of cash, will now be available through Jan 30. Originally the program, started on March 17, was supposed to last until mid-September.
  • Another program, where investment firms can temporarily swap more risky investments for super-safe Treasury securities also will continue through Jan. 30, the Fed said.
  • And, it also will let commercial banks, in a separate program, be able to bid on cash loans that last longer -- for 84 days, besides the 28-day loans now available (why don't we just end the charade and make it 3 years? We should be "healed" by then)
  • The Fed said it was taking these steps "in light of continued fragile circumstances in financial markets." The Fed said that the emergency borrowing program for investment houses and the program that lets investment firms temporarily borrow Treasury securities would be withdrawn should the Fed determine that conditions in financial markets are "no longer unusual and exigent." (fragile? Everyone told me Merrill Lynch offloading their assets yesterday at 22 cents on the dollar marked the bottom and its all upside from here? Hmmm... )
  • The European Central Bank and the Swiss National Bank have informed the Fed that they also will make available to their banks similar 84-day cash loans.
Again, where it the "welfare" for the peons of the country... you know... individuals. I'd like to trade my mortgage in for a nice horde of US Treasuries. And then keep rolling that over every 6 months and say "well I'm just not ready to take my mortgage back, I'm still under stress - you keep it Mr Bernanke"

[Jul 11: More Historic Actions (Potentially) by the Fed]
[May 4: Moral Hazard Run Amuck]
[Mar 22: A Historic 9 Days for the Federal Reserve]

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