Tuesday, October 7, 2008

Get out your calculator. The Fed is now discussing the purchase of companies’ unsecured debt, as if the bailout bill was not enough.

I think most would agree that $700 billion should be an adequate amount Mr. Bernanke. Are you really considering putting more taxpayer dollars at risk? I read in the New York Times article the Fed Considers Plan to Buy Companies’ Unsecured Debt that the Federal Reserve was taking into consideration a drastic new plan aimed at “jump-starting the engine of the financial system.” This plan is intended to get credit flowing again by purchasing unsecured commercial paper, basically I.O.U.’s from banks, businesses, and municipalities. These short-term loans are used to finance day-to-day operations of many companies. In doing this the Federal Reserve would inch closer than ever to actually lending money directly to businesses. What happened to encouraging a free-market society? Now the government would have a serious conflict of interest in addition to spending more tax dollars. Already the Fed announced it would “once again redouble one of its key emergency lending programs, increasing the size of its Term Auction Facility to $600 billion, from $300 billion. On top of that, the central bank plans to provide an additional $300 billion to banks to meet their end-of-the-year cash needs.” I don’t remember seeing that in the bailout plan so where is that money coming from? Oh wait; they can just print more money, I forgot. In fact they have no choice but to print more according to the article. To stop that flow of newly printed money from lowering the central bank’s overnight interest rate to zero, “the Fed also announced on Monday that it would start paying interest on the excess reserves that banks keep on deposit at the Fed.” By paying interest on reserves the Fed can set a floor on interest rates and retain at least some control over monetary policy.(NY Times)

Policy makers signaled that they now want to intervene directly in the credit markets. Officials said on Monday evening that they wanted to finish a plan as quickly as possible, perhaps as early as Tuesday. Again the rush is on proving that this initial rescue plan was not well thought out and almost certainly not the answer to the problem. “People are slowly but surely coming to the realization that playing ‘Whack-a-Mole’ with each of these issues as they arise doesn’t get the job done,” said Max Bublitz, chief strategist at SCM Advisors. In buying these unsecured loans the Fed faces yet another problem, violating policies that restrict it from buying assets that have the potential to lose money. Not to worry though, they can get around that by establishing a legal entity to purchase the assets on the Fed’s behalf. Why be prohibited from legally doing something if you have the capability of creating another entity that is not at all prohibited from doing the same thing on your behalf? Would you please just grant yourself the power to buy these loans and try to save us some of our tax dollars by not paying someone an unruly amount of money to head this newly formed organization you would need to create. We can at least be assured that in regards to the new plan being considered our government is willing to take their time to ensure the results will be successful because President Bush stated ” we don’t want to rush into this situation and have the program not be effective.” I completely agree Mr. President, I would sure hate to see your guys do the same thing two weeks in a row.

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