The latest bailout
Head still spinning over the Fed's latest bailout — er, excuse me, "capital injection" — for the big banks?
If you missed yesterday's 5 Min. Forecast , Addison and Ian put it in refreshingly plain English:
of firing up the printing presses and going about business as usual,
the Fed has unveiled a whole new plot, and a handy acronym to go with
it: Term Securities Lending Facility (TSLF).
new initiative, like the old Term Auction Facility (TAF), will provide
short-term loans to distressed financial institutions. But instead of
enticing banks with cheap interest rates, the Fed is now offering to
swap mortgage-backed securities for U.S. Treasuries.
Thus, a bank swelling with Fannie Mae and Freddie Mac paper and other
“AAA” mortgage-backed assets can unload it on the Fed for the next 28
days. The Fed wants banks to take that money and lend to the masses,
thus stimulating the economy. No word yet how much additional debt it
will take for the government to absorb this mess.
And for an excellent analogy, we turn to Dean Baker:
Suppose that it was suddenly discovered that much of the wealth held by
the country’s leading financial institutions was in fact counterfeit.
Instead of having hundreds of billions of dollars of real currency in
their vaults, institutions like Citigroup, Merrill Lynch, and Bears
Stearns actually had hundreds of billions of dollars of counterfeit
currency. Suppose further that the public did not know exactly who held
what in terms of counterfeit currency, only that all of them had a lot
In such circumstances, investors would be very reluctant to accept the
credit of any of the major financial institutions. They couldn’t know
whether most of their assets were in fact counterfeit, and they were
dealing with a bankrupt institution, or whether the counterfeit
currency was only a limited share of the wealth, which would not
jeopardize the institution’s ability to meet its obligations…
[So] the Fed is going to lend money to banks and accept the counterfeit
currency as collateral, treating it just as though it were real money.
The intended effect of this policy is to convince other investors
that the counterfeit currency is in fact real currency, or at the very
least that there is a really huge sucker out there (the Fed) which is
prepared to treat the counterfeit currency as real currency.
Baker laments that the establishment media isn't quoting any experts who think this is a bad idea. It's true. Aside from a few lefties like Baker and "hard-money cranks" like us (i.e., the few people who saw the housing bubble for what it was long before August of last year), there's basically no one. The nexus of Big Government, Big Finance, and Big Media thinks it's all just swell.
Meanwhile, our dollars buy progressively less and less, and this power elite has the audacity (or ignorance) to tell us that as long as we don't spend our money abroad, it makes no difference.