Fed should be taking on more risk
With interest rates approaching zero and billions of federal dollars already pumped into the banking industry, are there more tricks up the Fed's sleeve? Commentator Krishna Guha says there could be.
Krishna Guha (Krishna Guha)
More on Commentaries, America's Financial Crisis
TEXT OF COMMENTARY
KAI RYSSDAL: For the first time in a long while the Federal Reserve meeting that started this afternoon isn't about interest rates. The Fed Funds Rate, the short-term rate that Bernanke and the gang control, is already at 0.25 percent, it's lowest ever. The Fed's been making loans and guaranteeing assets for a year or more. And still there's no sign of recovery.
Commentator Krishna Guha says there's lots more the Fed can do -- but there's a catch.
KRISHNA GUHA: There's a risk this week's Fed policy meeting could be a bit of a damp squib -- at least compared with the last one, when rates were slashed and a radical new policy framework emerged.
There's a lot more the Fed would like to do to revitalize credit markets. But the law prevents it from taking much credit risk. So, in order to expand its riskier lending operations, it needs capital from Treasury's TARP fund to absorb likely losses.
The Obama Treasury might not be ready to give the Fed the money just yet. And it might not want the Fed to take all the credit for what are, after all, Fed-Treasury joint ventures.
The market won't take too kindly, though, to any suggestion that the Fed is in effect on hold. So, here's what I'd like to see:
First, the Fed should expand their existing scheme that provides low-cost money to investors willing to buy consumer and small business loans packaged as securities. By supporting the secondary market for these securities, the Fed can revitalize the primary markets where these loans are made. This would require additional Treasury risk capital.
Second, they need a similar scheme to finance investors willing to buy commercial real estate and jumbo residential mortgage-backed securities to bring these markets back to life, too. Again, this would require more risk capital from Treasury.
But one thing the Fed can do without the need for more Treasury support is to step up the rate at which they're buying Fannie Mae and Freddie Mac mortgage-backed securities and debt. In bang-for-the-buck terms, buying Fannie and Freddie paper makes more sense than buying U.S. Treasuries.
Finally, the Fed should seek the authority from Congress to issue its own debt, to help it manage the wind-down of all these lending operations once the crisis is over.
Will anything on my list come to pass? I think everything will sooner or later. But exactly when is harder to tell. The Obama team may well be forthcoming, but they seem to dislike incremental intervention and might be storing up ammunition for a big bang in mid-February.
That could leave the Fed treading water for a while -- an uncomfortable prospect for investors and the economy.
RYSSDAL: Krishna Guha is the U.S. economics editor for the Financial Times.
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From Sarasota, FL, 01/27/2009
" Damp Squib ":
Just a bit of elaboration, comes from England, probably Guy Fawke's Night ( 5th November each year _ " Fireworks Night " and/or " Bonfire Night " ), when one threw a banger firework i.e. light a small firework that, end-fuse goes bang, and then hand throw it. England's so wet and rainy in Nov., of course especially for the kids just on that Night; invariably the banger fizzled on the damp ground and didn't - alas - scare anyone. A Damp Squib, a fizzle out, a disappointing event !
From seattle, WA, 01/27/2009
First off (thanks to allwords.com): damp squib noun a firework that fails to go off, due to wetting (idiom) (by extension) anything that doesn't work properly, or fails to come up to expectations Next: I still haven�t gotten a good reason why the government is not offering it�s bailout to people who are at risk of foreclosure instead of to banks who are just waiting it (or worse using it to fund the deterioration of workers rights). Supposedly the problem with toxic mortgages is that no one can identify them. I promise the person being foreclosed on knows who they are. If the government advertises an 800 number that someone can call to get some help with their foreclosure people in trouble will call. The government can pay off a portion of the mortgage that brings the house down to a lower monthly payment for the homeowner. This bails out the homeowner and the bank and all the middlemen between and completely sidesteps the administrative waste (accidental or otherwise) that would occur. Sure, I can hear some whiners bemoaning their neighbors getting a cheaper lunch but why are they more upset that they are giving free money to their neighbor than they are about giving it to banks? I guess we Americans are getting exactly what we deserve, since we would rather pay thousands in taxes to deny our neighbors, strangers, friends and family a �free lunch�. WTFWJD?
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