Not a chance in hell. If they could fix, they wouldn't have let it get this stage in the first place
On Sep 23, 10:19 am, Travis <[EMAIL PROTECTED]> wrote: > From: Travis > Subject: Can the Rescue Plan Fix the US Economy? > Date: Monday, September 22, 2008, > > Can the Rescue Plan Fix the US Economy? > > *Daily Article* by Frank > Shostak<http://mises.org/articles.aspx?AuthorId=115>| Posted on > 9/22/2008 > Given last week's dramatic events — the bankruptcy of Lehman Brothers, the > end of Merrill Lynch's independence, and an $85 billion US-government > bailout of insurer AIG — most financial institutions are likely to become > more sensitive to the state of their net worth. > For instance, all it takes for a financial institution that has a net worth > of $30 billion and assets of $600 billion to go under is for the value of > assets to fall by 5%. In the current financial climate, it can easily > happen; hence, most financial institutions are not immune from the potential > threat of going belly up. > One of the major reasons why the Fed rescued AIG was to prevent a fall in > the value of bank assets, a fall that would in turn expose their true net > worth and cause (it is generally believed) a run on banks that would > decimate the entire banking system. As long as the AIG can keep paying the > banks' losses for their suspect (but insured) investments, those banks don't > need to reappraise their true values. > But there is always the lingering fear that at some stage banks will be > forced to disclose market-related valuations and that this could set in > motion a financial tsunami. > Mortgage-linked assets are regarded as being at the root of the present > credit crisis — the worst since the Great Depression. To eliminate a > potential threat from devalued mortgage-linked assets, US Treasury Secretary > Paulson and Fed Chairman Bernanke are planning to move these assets from the > balance sheets of financial companies into a new institution. The Bush > administration is asking Congress to let the government buy $700 billion in > bad mortgages as part of the largest financial bailout since the Great > Depression. > The plan would give the government broad power to buy the bad debt of any US > financial institutions for the next two years. It would also raise the > statutory limit on the national debt from $10.6 trillion to $11.3 trillion. > But how is the transfer of bad paper assets to some new institution and > their replacement with a better quality of assets — with Treasuries, let us > say — going to fix the economy? How can it reverse the present slump in the > housing market? > The Treasury and the Fed believe that allowing financial institutions to get > rid of bad assets will remove the threat of banks' having to assign correct > values to their suspect assets. It is held this will bring things back to > normal, that the banks will start expanding mortgage loans and revive the > housing market and in turn the economy. > But allowing banks to get rid of bad assets doesn't imply that they will be > keen to expand mortgage lending, thereby accumulating new potentially bad > assets. > At present, for most US banks, the major concern is improving their net > worth, i.e., strengthening their solvency. This means that banks are likely > to slow the pace of expansion of their assets, and the volume of lending is > likely to come under pressure. In the week ending September 10, commercial > banks' total assets fell by $33.9 billion. The yearly rate of growth of > total assets fell to 4.9% from 6.7% in August and 12.7% in March. > According to the Federal Deposit Insurance Corporation (FDIC), commercial > banks and savings institutions' net worth fell by $10 billion from Q1 to Q2. > This was the first decline since the data was made available in Q2 2000. > At the root of the problem are not mortgage-backed assets as such but the > Fed's boom-bust policies. It is the extremely loose monetary policy between > January 2001 and June 2004 that set in motion the massive housing bubble > (the federal-funds-rate target was lowered from 6% to 1%). It is the tighter > stance between June 2004 and September 2007 that burst the housing bubble > (the federal-funds-rate target was lifted from 1% to 5.25%). > The tighter monetary stance put a brake on the diversion of real savings > toward bubble activities. Now the effect of a change in monetary policy > operates with a time lag. We suggest that the tighter interest stance of the > Fed between June 2004 and September 2007 has so far only hit the real-estate > market and financial institutions. > Various bubble activities that sprang up on the back of loose monetary > policy between January 2001 and June 2004 are not only in the real-estate > and financial sectors; they are also in the other parts of the economy. > Consequently, there is a growing likelihood that these activities will come > under pressure. Since they are the product of loose monetary policy, > obviously the banks that supported them are going to incur more bad assets, > which will put more pressure on banks' net worth. > The US Congress May Help Bernanke to Increase Monetary Expansion > The rescue package is a combined act by the US Treasury and the Fed and is > seen by experts as a comprehensive approach since it also addresses the > issue of liquidity. The chairman of the Fed, who is fearful that the > American economy could plunge into depression, holds that the only way to > prevent this is through massive monetary pumping. > We suspect that Bernanke is of the view that he hasn't been allowed to > operate "properly" to prevent the current upheavals in financial markets > because he wasn't free to pump money at liberty. > In the present setup of interest targeting, the Fed cannot simply pump money > unhindered into the economy and boost monetary liquidity. Monetary pumping, > while the federal-funds rate is at its target, will push the rate below the > target. To bring the federal-funds rate back to the target the Fed is > obliged to sell assets such as Treasuries to absorb money from the > federal-funds market. > All this means that if there is no upward pressure on the federal-funds > rate, the Fed cannot pump money without pushing the rate below the target. > For instance, if the Fed increases lending to a financial institution, the > new money that will enter the financial market will put downward pressure on > the federal-funds rate. > To eliminate this downward pressure, the Fed will be obliged to sell > Treasury securities. By selling these securities, the Fed takes money from > the market. In this way the US central bank offsets the downward pressure on > the federal-funds rate brought about by the increase in lending to financial > institutions. Note that the holdings of Treasuries by the Fed play an > important role in the process that we have described. > As a result of all the actions to boost liquidity taken by the Fed since > August 10, 2007, the US central bank holdings of US Treasury securities has > dwindled. Just a year ago, the Fed held $780 billion in Treasuries; by > September 17, 2008, this has fallen to $480 billion. Year-on-year Treasury > securities holdings by the Fed fell by 38.8% in August after falling by > 39.4% the month before. This was the tenth consecutive month of yearly > decline. > So far in September, the yearly rate of growth has stood at negative 38.5%. > If we allow for the $200 billion that the Fed pledged to the Term Securities > Lending Facility and the $85 billion loan to AIG then the amount falls to > $195 billion. > If more institutions are on the brink of bankruptcy, and the Fed decides to > provide support to them, it would have difficulty in doing so without a > sufficient inventory of Treasuries. Again, if the Fed were to run out of > Treasuries, then any lending by the Fed would lead the federal-funds rate to > fall below the target. > To help out the Fed, last Wednesday, the US Treasury announced that it would > auction $100 billion in debt in order to offset the monetary pumping by the > Fed. > Observe again that the Fed has officially been engaged in actions to boost > liquidity since August 10, 2007. All this means that the Fed might appear to > be loose, but in reality, the overall pumping by the Fed, as depicted by its > balance sheet so far, has been moderate. > The yearly rate of growth of the Fed's assets stood at 4% in August against > 3.8% in July. Note that since November 2004, the growth momentum of the > Fed's assets has been in a downtrend (the yearly rate of growth in November > 2004 stood at 7.1%). > How Can the Fed Boost the Money Supply? So how can the Fed boost the money > supply without pushing the federal-funds rate to below the target? One way > of achieving this is by asking the Treasury to issue more debt. Once the > Treasury sells more debt to the public, this absorbs money from the > federal-funds market. As a result the federal-funds rate will be pushed > above the target. Once this happens, the Fed will step in by buying the > Treasuries from the public. > Remember that, by buying Treasuries the Fed injects money into the > federal-funds market. The new money in turn pushes the federal-funds rate > back towards the target. The final outcome of all this is that the money > supply has increased and the Fed now has more Treasuries, i.e., its balance > sheet has increased. > Now this way of boosting money supply and monetary liquidity is somewhat > cumbersome. It also raises the level of the Treasury debt and pushes > long-term yields and hence mortgage interest rates higher than they would > have been. > The better way, according to Bernanke and US central bank officials, is to > pump money any time they think it is necessary. Not only will this boost > monetary liquidity but it will also boost the Treasuries holdings by the > Fed. (Remember: to pump money, the Fed buys Treasuries.) > But how can this be done, given the fact that to keep the federal-funds rate > at the target prevents the Fed from pumping money at liberty? > A solution is on its way — to pay interest on bank deposits held at the Fed. > By paying banks an interest rate, which corresponds to the target rate, the > Fed removes from banks the incentive to lend surplus cash to each other. As > a result, the federal-funds rate will not fall below the target in response > to the Fed's monetary pumping. ... > > read more » --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. Register and vote in our polls. * Read the latest breaking news, and more. -~----------~----~----~----~------~----~------~--~---
