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Bigger Than Just "The Bailout"

Published 10/07/08 Craig Harrington - Print Article
E-mail - editor@economyincisis.org

As the Treasury Department begins to act on its $700 billion Wall Street rescue, the Federal Reserve announced its plans on Monday to increase the amount of money available for banks by hundreds of billions of dollars, according to CNN Money.

The Federal Reserve “term auction facility,” which allows the use of mortgage-backed securities as loan collateral, will be doubled in size to $300 billion. The total amount available for interbank lending is now $600 billion. The Fed also stated that it could push the limit for its “term auction facility” to $900 billion by the end of the year. Coupled with the Treasury Department's plan, the two major institutional authorities of American banking and finance pieced together over $1.4 trillion in lending programs in just a few weeks.

The plan is meant to help stabilize the nation's financial institutions until the Treasury's sweeping plan is implemented. However, the advisability of the program should be questioned. Accepting mortgage-backed securities as collateral for lending is a dangerous and perhaps unnecessary risk on the part of the Fed. These securities are at the heart of our current financial conundrum and are liable to default. If that is the case, the Fed could be left holding billions in worthless collateral.

Some, like Kevin Giddis of Morgan Keegan & Co., believe that the Fed had little choice in the matter, that it had to “pump as much cash as possible into the system, no matter the risks.” Instances when a decision-maker is faced with only one possible option are very rare. The Fed could have chosen the responsible option and curtailed the money supply by making cash less easy to come by. Shortening the money supply would run the risk of dampening economic growth and possibly forcing some small businesses under. But in our current economic climate, the risk of business failure is omnipresent regardless of what choices are made at the top.

Our economy is in shambles because our industries are unproductive, our trade imbalance is insurmountable and our government has been buried under a mountain of its own debt. We have pursued unsustainable economic policies for decades, and our comeuppance is returning with a vengeance. Our economy was built on the farce of “commercial paper” and that disguise has been revealed. Instead of lowering its lending standards so as to allow commercial banks and other institutions to further lower their lending standards, it might have been prudent to take a stance against this problem and actually try to fix it. The Fed's move on Monday is a band-aid and nothing more.

Source CNNMoney:

The Federal Reserve announced Monday that it will increase by hundreds of billions of dollars the money it makes available to the nation's banks.

…

The rapid expansion of the Fed program is essentially like an emergency bridge loan for institutions caught in a credit squeeze, said Kevin Giddis, head of fixed-income sales trading and research for investment firm Morgan Keegan.

The Fed had little choice but to try to pump as much cash as possible into the system, no matter the risks associated with taking damaged assets as collateral, Giddis said.

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