Federal Reserve Now a Bank Like Any Other: Good or Bad?

Posted on October 7, 2008

In a move that defies logic the Federal Reserve has now decided to lend money to non-financial corporations, transforming itself into a financial institution, like any other, but with unchecked powers and absolutely no monetary constraints (i.e. regular banks actually do have a balance sheet and reserve requirements). With this new lending facility, the Fed is slowing moving away from its intended function of a “lender of last resort” to a “lender of only resort”.

Is this move a good one? Since the Fed has already proven that it cannot even lend money properly to financial companies where it conceivably has some inside information, are we now to believe that the Fed can lend intelligently to non-financial corporations given that it has zero experience or knowledge of this market?

How many people who work at the Fed have any corporate lending experience in the short-term commercial paper market? Can the Fed actually know enough about eligible non-financial corporations to possibly buy their debt? Won’t this inability to do due diligence in the non-financial market greatly increase the potential of fraudulent loans and massive financial theft in the US?

I’m honestly not sure how this latest move of desperation by the Fed is designed to provide any confidence to investors or banks to start lending again. In fact, I think it may paradoxically lead to a further contraction of credit from banks.

Coincidentally, if the Fed simply used $700 billion to buy an existing bank (or merge/nationalize several banks), with existing deposits (which it fully guaranteed), and an existing infrastructure to make non-financial loans, the crisis would slowly end. But, alas that solution is simply too easy and does not feed Bernanke’s addiction to print money and Paulson’s propensity to provide financial rewards to his cronies.

Overall, there seems little reason for optimism at this time, despite sharply lower stock prices and we remain in danger of permanently damaging the financial system as we know it, leading to a sustained period of low equity prices.

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1 Comment so far
  1. Trying To Follow The Money « Cinie’s World February 2, 2009 8:49 am

    […] In looking into the simple question, “who owns the Federal Reserve?” a lot of names came up of people affiliated with the Obama administration and campaign.  Coincidence?  Maybe, but, I’m not sure there’s that much coincidence in the world.  And given all the hide-in-plain-sight realities of the Fed’s interesting history and practices, conspiracy theories don’t seem quite so far-fetched.  That so many questionable situations would converge around one man at one point in time is astonishing, and bears investigation.  I suggest, as many of my commenters have, starting with Logistic Monster’s Fed page, there’s a lot of stuff there, not necessarily connected to Obama, but, conclusions are for each person to draw for themselves.  Another site provided by Daily Puma’s Alessandro Machi is worth a look.   I provided a few Fed related links in my earlier post, and would appreciate readers’ input after following them.  There’s something here, folks, and I’m not sure I can find it all by myself.   But questions about where Obamania came from, who’s behind the sudden orchestrated rise of an obscure politician, and what, if anything, it all has to do with how the world we live in turns out, shouldn’t be swept under the rug just because he’s president now.  We need to keep looking at all sides, everything we can get our hands on, pro and con, and figure out the truth.  If there is something there, letting bygones be bygones is what the culprits are betting on.  Hell, if it turns out just to be a tin foil hat party, so be it.  At least it’s not an Obama 2.0 stimulus house party scam sham. […]

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