Friday, December 03, 2010

Beyond the "Fed Loans" Political Crap

A lot of politically-inspired chickencrap has been thrown into the water in the last day over the Federal Reserve's $13Tn in emergency lending during the bank crisis of '08/'09. Most of the chickencrap depends on half-truths and scary names, like "General Electric."

While I'm not an enthusiast about GE's utilization of its muscle--nor of Goldman Sachs' utilization of its extensive old-boy network for craven self-protection--there are good reasons for the Fed's action which, somehow, got lost in the vast cloud of Issa/Drudge dust.

There were three principal components: 1) provision of liquidity for 'money-market funds'; 2) provision of liquidity for various industrials; and 3) TARP.

The Bloomberg story linked here gives a fairly well-balanced brief narrative.

In short: when Lehman collapsed, the money-market funds were in deep doodoo, as they could not dump assets fast enough to cover withdrawals. This was the first real "panic" which triggered the Fed's first action: lending to MM funds and announcing an FDIC-like 'guarantee' of deposits.

If that had NOT happened, your money-market fund may well have collapsed, leaving you with a very, very large hole in your assets column. Fuggedabout retirement, much less paying for the kiddies' high-school fees or college tuition.

The second action was Fed purchases of commercial paper. That allowed such as GE and Harley to pay their day-to-day bills (including payroll, postage, and vendors). I don't have to tell you what effects a few (like 90-120 days' worth) of missing payrolls might have had on the economy, do I?

The third action was TARP. It was controversial--and to me, not entirely well-advised--but it essentially allowed a LOT of banks to continue functioning, at least for the time being. You have noticed that even with TARP, many banks have failed. You wanted that to happen all at once?

(TARP, and money-market and commercial-paper-like facilities, was also extended to foreign banks because they do a LOT of business with US banks. (For that matter, UBS has a branch in Brookfield, folks.) Killing the foreigners would have seriously--maybe fatally--wounded the domestics, suddenly. By suddenly, we mean close-the-doors-at-12:15-we're-not-paying-checks-drawn-on-your-account, too bad, so sad and no, you don't get your Christmas Club money, either.)

It remains to be seen whether TARP money gets repaid. And there are lots of Wall Street cretins who should be.........ahhhh........horsewhipped, just for starters.

Given what we know so far, the programs were mostly successful in their immediate aim: keeping banks and major companies afloat.

Don't let the usual commentariat-meisters get your undies in a bundle.


Anonymous said...

One big flaw in your argument is that these expedient short term actions will have long term results. The system is bankrupt, is riddled with corruption, even before TARP. And postponing necessary corrections will make the future downturn far worse, and likely make the recovery longer than if we had bitten the bullet.

Note that we were involved in an unpleasant correction in 2001, and the FED and Co. poured in liquidity which, to be sure, kept a number of marginal businesses afloat for a few more years. But note also that the correction in 2008/9 was deeper and more severe than if we had allowed the unprofitable to go bankrupt back in '01. At some point, the wheels will fall off the bus, and there will be no fix other than to let the market take its course, which of course, is what we should have done in the beginning. I see little long term good in protecting the "too big to fail" from the effects of their own folly. And I see great resentment among taxpayers if we repeat the actions of the recent past.

Ken Van Doren

Dad29 said...

he system is bankrupt, is riddled with corruption, even before TARP

No argument there, but the "system" has been corrupt since.......ohhhh........Aristotle's day, or before.

You'll find plenty of references on this blog to the Zombie Citi, along with calls to let it expire.

Or are you advocating letting GE and H-D (inter alia) simply not meet payrolls for several months?

You must have a helluvalotta C-rations in your basement.

Jeremy R. Shown said...

OK......but it seems we have now entered an era of explicit government bailouts for ally kinds of poor business decisions.

How do we un-ring this bell? Is it even possible?

Dad29 said...

Cynic that I am, I expect that the Too Big to Fails will NEVER fail; Gummint will always fix it.

The only hope our grandchilluns have is that the damn banks manage to regain profitability.