...because that's where the money is -- oops, er, "the money was."
Bernanke’s financial rescue debacleBy Mike Whitney
Online Journal Contributing Writer
Analysis
Apr 8, 2009, 00:22
Fed chief Ben Bernanke has embarked on the most radical and ruinous financial rescue plan in history.
According to Bloomberg News, the Fed has already lent or committed $12.8 trillion trying to stabilize the financial system after the bursting of Wall Street’s speculative mega-bubble. Now Bernanke wants to dig an even bigger hole, by creating programs that will provide up to $2 trillion of credit to financial institutions that purchase toxic assets from banks or securities backed by consumer loans. The Fed’s generous terms are expected to generate a flurry of speculation which will help strengthen the banking system while leaving the taxpayer to bear the losses. It is impossible to know what the long-term effects of Bernanke’s excessive spending will be, but his plan has the potential to trigger hyperinflation or spark a run on the dollar.
Bernanke’s zero-percent interest rates, multi-trillion dollar lending facilities and bank bailouts do not fit within the Fed’s narrow mandate of “price stability and full employment.” With unemployment soaring to 8.5 percent and increasing at a rate of 650,000 per month (with 15 percent underemployed) it is a wonder that Bernanke hasn’t been fired already. There are also myriad problems with Bernanke’s lending facilities which are nothing more than a crafty way of transferring wealth from the Fed to private industry via low interest loans. The Central Bank is not supposed to “pick winners” as it is blatantly doing through its market-distorting facilities. Businesses outside the financial sector cannot exchange their downgraded garbage with the Fed for semi-permanent, rotating loans, so why should underwater investment banks and hedge funds get special treatment? The facilities represent a gift to financial institutions giving them an unfair advantage in the marketplace.
Besides the $2 trillion for the Term Asset-Backed Lending Facility (TALF) and the Public-Private Investment Program (PPIP), the Fed will also provide a multi-billion dollar backstop for the FDIC as bank closures continue to snowball and more reserves are needed to shore up the system. That means that the Fed’s balance sheet could mushroom to over $4 trillion by the end of 2010. The Treasury has already agreed in principle to assume full responsibility for the Fed’s lending facilities (as well as the bailouts of AIG and Bear Stearns) as soon as the financial system stabilizes. By providing loans and US Treasuries to failing companies, instead of capital, Bernanke has sidestepped Congress, thus, undermining the spirit and the letter of the law. Congress has approved a mere $1.5 trillion of the nearly $13 trillion for which taxpayers are now responsible.
The recent 22 percent uptick in the stock market is a sign that Bernanke’s monetary stimulus is beginning to kick in. Oil rose from $33 per barrel to over $50 in little more than a month. Other raw materials have followed oil. The dollar has plunged every time the stock market has gone up. These are all signs of nascent inflation which is likely to accelerate after the current period of deleveraging ends. Food and energy prices will rise sharply and the dollar will come under greater and greater pressure. This is Bernanke’s nightmare scenario: a surge in inflation that forces him to raise rates and kill the recovery before it ever begins. The Fed’s unwillingness to be proactive in dealing with credit bubbles has created a situation where there are no easy answers or pain free solutions.
Bernanke’s approach to the crisis has been wrongheaded from the get-go. It makes no sense to commit nearly $13 trillion to prop up a grossly oversized financial system while providing less than $900 billion stimulus for the real economy. The whole plan is upside down. It’s consumers, homeowners and workers that create demand (consumer spending is 72 percent of GDP) and yet, they’ve been left to twist in the wind while the bulk of the resources have been directed to financial speculators who are responsible for the mess.
Middle class families have seen their retirements slashed in half and their home equity vanish, while their jobs become increasingly less secure. The Fed and the Treasury should be focused on debt relief, mortgage cram-downs, jobs programs and open-ended support for state and local governments. Rebuilding the financial infrastructure for extending more credit to people that are already underwater is beyond shortsighted; it’s cruel. The financial system needs to shrink to fit the new reality of a smaller economy. That means that Bernanke should aggressively mark down the dodgy collateral he’s been accepting (the collateral should reflect current market prices) and force many of the weaker institutions into bankruptcy. This is the fairest and fastest way to shake the deadwood from the financial system. Keeping asset prices artificially inflated only puts off the inevitable day of reckoning.
CONTINUED...
http://onlinejournal.com/artman/publish/article_4565.shtml D'ya ever get the feeling that no matter what cards we play, the other side can pull out their wallet and raise the bet past anything we can see?
That $12 trillion could re-invent the nation's economy and save the planet. But no.
Most importantly: Good to read you, Karenina? Wie geht es Ihnen, Fraulein?
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