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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