Posted on 06/12/2010 2:27:43 AM PDT by CutePuppy
Attacks / "bear raids" and runs on the investment banks (Bear Stearns was the test run) were before TARP. Electronic withdrawals from Primary Reserve Fund and other MFs was pure post-Lehman panic "run" (PRF held about 1% of Lehman bonds which became worthless upon Lehman's bankruptcy):
Father of money market funds charged with fraud - FR, 2009 May 05, posts #10 and #11 (and link at #11)
So basically, tax dollars were used to preserve a system (or at least several large entities within a system) that was supposedly collapsing due to bad lending practices and insufficient cash reserves? Is that what I'm gathering from this?
Basically, Fed (which is the lender or intermediary of last resort and is the "keeper" of the U.S. "financial system" and THE provider of liquidity of the financial system) along with U.S. Treasury, made or guaranteed ("backstop") loans to the federally charted conduits of the financial systems (and the same entities who are asked and keep buying ever more doubtful U.S. government debt in the form of bonds) to provide the necessary liquidity to keep buying other banks' or people's debt the value of which was in doubt at the time. That was done in the form of loans, not giveaways (GM / Chrysler / UAW bailout issue aside) and has since mostly been repaid, with interest to the Fed and the Treasury by the banks, immediately after the liquidity crisis has passed (banks wanted to repay faster, but Treasury and FDIC would not let them for some time, so it cost banks more to repay).
Are the depositors not protected by FDIC?
Not commercial "depositors" as their "commercial paper" or "repos" are too large for FDIC. Primary Reserve Fund and other funds or banks are holders of this kind of paper, so it could be useful to think of Fed / TARP as FDIC on steroids for depositors of pensions and other investment funds (to simplify things a little). FDIC limit for single personal accounts was $100K at the time and has been increased since the crisis to $250K.
Would failure of these entities resulted in overall economic collapse?
Unquestionably, that's the reason for the 9/15 panic and electronic run on the funds that held these instruments by other funds. Game of musical chairs at the speed of electrons.
Oh, Greece is coming here. They're just a couple of socialistic steps ahead of the US, that's all.
If our government or the economic policies are not changed, absolutely. Bush and Republican Congress of the 'Naughts were bad in regards to spending, Obama and Dems are that on steroids plus new laws and regulations:
US Will Be Greece in 10 Years: Walker - CNCB, 2010 June 10, by David Walker, former US Comptroller General.
The way I see it, the TARP and subsequent bailouts just kicked the can a little farther down the road.
No, TARP just [temporarily] provided liquidity when liquidity was needed - that's what Fed is there for, and why it was created in the first place. TARP legislation was needed to get Congress on board and accountable / transparent, but most of all, to give a big enough, oversized credit line number ($700B) to provide the confidence to the markets and consumers so that "bear raids" and "runs on the banks" would stop, which TARP did immediately. Abuses by executive and Congress later are beyond that intent or the law itself, but they are now recognized as abuses, beyond the achieved goals of TARP.
Excessive leverage on the private side has been replaced by excessive borrowing on the government side.
No, it was always government's - Fannie and Freddie and FHA own or guarantee 9 out of 10 mortgages in the U.S. and CRA and many Chief Executives mandated the or encouraged "home ownership" / "ownership society" (regardless of price or affordability) - that's how this particular bubble was created, over many years. This short articles explains it, and a good primer to understanding:
Financial Industry Not at Fault for Crisis - CNBC, 2010 June 10, by JeeYeon Park
“The thing I find quite irritating is that they (global governments) blame the financial industry for just rating their performance,” Schroeder told CNBC. “The governments have been poorly managed for the last decade, if not even more, and all the market’s doing is reflecting that.” Schroeder said the real cause of the crisis was the combination of excess liquidity available in the U.S. and the “political motivation” that "everyone" should own a house. Schroeder also pointed out that investors are ultimately the ones who end up buying the government debt. This crisis is a “pure government debt crisis,” not one of the financial markets, and it is the regulators and the politicians' jobs to notice the bubbles that cause crises, said Karsten Schroeder, chairman of Amplitude Capital. He shared his insights.
BTW, it's hard to see a financial collapse coming as a result of the failure of Lehman, when ones' savings are intact at the credit union and ones' credit card still works at the local BP station. In other words, the connect between these macro events and the micro world isn't easily seen.
On the contrary, the international banking system is intertwined and interconnected to the hilt. If you don't see the connection between your 401(k) held in commercial paper or ARS or bonds held in an institution that is going bankrupt, then there is no way anyone can convince you of what we were facing. When otherwise solvent companies could not get access to their money or use them as collateral to get loans to finance themselves through the weekend, which is what was happening just before TARP was voted on the second time, and had to declare bankruptcy for lack of financing operations, I think you know there is a financial collapse in progress. But you are entitled to your opinion on that.
Yeah, Fed needed ZIRP to recap the banks and their balance sheet. They did stop the monetary intervention and started to make statements (”noises”) about raising the rates, when the Greece / EU crisis hit and everybody piled into U.S. Treasuries, so that was put on hold for a while.
Fed is trying to be responsible and ready to sop up the liquidity to prevent inflation when needed, but right now the world needs the “safety” and reserve currency, and for the moment, USD is it. So much for dollar losing “reserve currency” status and Euro replacing it.
The good (funny?) thing about it, that OPEC and Iran, in particular, took a bath on converting their oil sales to Euro. China took a small hit, to some extent, too, when they “diversified” a relatively small amount from Dollars to Euros just about a month before crisis hit.
There was no worse way of providing liquidity at that point. The borrow short, lend long paradigm was about to implode as it inevitably will, but providing more short term loans has only made that bubble worse. The answer then and now is to free up long term capital so it can provide needed long term liquidity. That means zeroing out long term capital gains taxes and drastically reducing corporate taxes. There is lots of real capital ready to provide liquidity, but with the Fed threatening inflation (which TARP only exacerbates), it will stay in short term speculative carry trades.
The real purpose of TARP was to prop up the speculative treasury bubble. Treasury simply extracted capital from the markets, siphoned it to big banks who turned right around and bought treasure bills. At that point the Fed promised that they would be ultimate greater fool and buy those (worthless) T-bills back using QE. Now they have created a situation of no return - either they renounce QE and treasuries crash or they continue the treasury bubble with the implicit promise of QE in the case of a treasury crash.
I agree (I would go even further with zeroing out any investment or repatriation of foreign deposits taxes and corporate income taxes because of double/triple and pass-through taxation nature of each), and would be great... but it's a matter of long term economic policy (which is, unfortunately, even more unlikely now than it was during all the time Republicans had total control of Congress and White House), not the emergency response policy when the market needed liquidity yesterday and "bear raids" and runs on the banks were freezing interbank or corporate lending and normal access to their own capital.
...either they renounce QE and treasuries crash...
Of course, Treasuries are in a bubble, particularly with the flight to "safety" (kind of sounds like oxymoron with our fiscal deficits policies) but Fed has already withdrawn market support last month, with a good lead time of warnings, and is prepared to sop up liquidity (unless needed as world "reserve" which mitigates inflationary pressures for now).
Bernanke is not an idiot, he is well aware of delicate deflation / inflation balance, but he has to deal with idiotic fiscal policies and new upcoming deficits / debt bombs. Fed can only do so much at any one time. Until we get fiscal problems under control, I would not go blaming the Fed for putting out the fires - the money will inevitably flow to the next bubble, be it Treasuries or gold or ... regional real estate ... or you name it...
As history will undoubtedly show, he is. Easy credit and deleveraging are what he was balancing and his only justification for Fed window expansion and TARP was to stop deleveraging. The better action at that point would have been an inflation bomb, a one time devaluation of debt. What we have instead is an open-ended commitment to Fed easing swayed by Treasury's need for low rates. The blame can't be completely on the Fed but certainly their method of putting out fires (smothering them with dry brush) is absolutely guaranteed to create new bubbles.
The problems with bubbles aren't just an "inflation" vs "deflation" balance as Bernanke may believe (those are side effects that he is not going to effectively control), but a malinvestment that cannot be corrected without real economic pain. Avoiding the pain by creating new malinvestment also steals resources from the rest of the economy and keeps it from recovering.
... but a malinvestment that cannot be corrected without real economic pain. Avoiding the pain by creating new malinvestment also steals resources from the rest of the economy and keeps it from recovering.
We can blame the Fed for many ills in the past, but they had to choose the "least of all evils," evils of malinvestments in real estate (and,correspondingly, the financials that serve the industry) that were caused directly by long-standing fiscal policies of several administrations and quite a few Congresses (the "carrots" by Fannie + Freddie + FHA and the "sticks" by CRA + the courts).
Fed wasn't the cause of malinvestment bubbles in real estate, at best it may have been a facilitator (particularly with rates lowered after 9/11 to spur the economy) because Fed only has the bluntest of instruments to work with. Unless and until the fiscal policies of "tax, borrow and spend" are changed, monetary policies will only reflect what kind of pain (symptoms) we will experience, and where it will hurt, but not how much of the pain we will have to bear.
We can argue about what kind of monetary "medicine" the Fed should impose on us to take, to alleviate some of the current symptoms, and how much pain to spread over what period of time, but we'll never get rid of the pains (in different "malinvested" places) until we get rid of the disease of Big Government, spending us into oblivion and dictating the future areas of public and private malinvestment bubbles and what we should spend on or "invest" in ("green economy" is the latest one, replacing the "ownership economy"). Using monetary policies to put out the fires caused by malinvestment bubbles caused by political considerations and fiscal policies, is a never-ending proposition and a great finger-pointing exercise for politicians; it's chasing after the symptoms instead of curing the disease. Having to use the Fed in such fashion is a "malinvestment" in its own right.
It's not institutions or industries that are Too Big To Fail we need to worry about, it's the Government Too Big To Succeed™!
Valid points. But the "credit economy" is still far worse. It is a much more than a "facilitator" of bubbles, it is a magnifier. The delusions of crowds is an economic fact regardless of Fed policy, but those bubbles will not be magnified without credit. Not only that, they will end quickly with resources still available for the next big thing (which will grow the economy but also potentially become a bubble).
My bottom line is credit needs to be priced properly based on default risk and inflation risk. The longer the Fed intervenes and misprices credit, the worse the ultimate outcome will be. The shorter mispricings of the late 80's were never fully rectified in the early 90's recession and then things got worse in the 90's and horrible in the 00's We will see what happens in the 10's
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