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How to tell if things are going very badly
If the Fed ends up guaranteeing commercial paper and/or interbank loans. Too many people are listening to Polonius.
Posted by Tyler Cowen on October 6, 2008 at 03:38 PM in Economics | Permalink
Comments
It's been argued[1] that interbank loans have frozen up because banks can get money from the TAF and other Fed lending facilities instead. Cutting back direct Fed lending in favor of assuming some/all of the risk of direct interbank loans would get the interbank loan market moving again. There isn't much of a moral hazard problem here, either, as it's already been made clear that bank failures will be met with bailouts.
Indirect and responses have so far failed to get Libor down to reasonable levels. The Fed could do a lot worse than to remove the risk premium from the interbank market.
[1] http://www.nakedcapitalism.com/2008/09/libor-surges-to-nearly-7-but-us-stock.html
Posted by: Curmudgeon at Oct 6, 2008 4:17:51 PM
Actually, I think that things are going extremely badly because the Fed and Treasury and FDIC haven't been doing nearly enough to address the panic in the capital markets.
In fact, the FDIC has almost gone out of its way to CREATE UNCERTAINTY in how different levels of creditors of troubled institutions will be treated - at IndyMac, depositors over the $100k limit only got partial recoveries, at Wamu depositors were protected but creditors were not and at Wachovia everyone will be protected -- as William Isaac has been pointing out, just announcing that from now on all depositors and creditors will be protected would make an enormous step in restoring confidence and might even save money by forestalling further incredibly expensive failures.
Posted by: Anarchus at Oct 6, 2008 4:40:29 PM
A little off topic:
The long term trend since the start of industrial revolution has been for lower interest rates does this not make banks less important as the inefficiency of the bank makes up for higher returns that they can generate by lending money multiple times. For example With the Vanguard Total market fund yield at about 2% why would a public company borrow money when they can sell stock and get equity partners who share more in the risk? Why would a person borrow money at 6% and have money in an IRA? Why wouldn’t people use more rent to own in housing. (Rent to own seems to me align owner and renter interests as well as mortages.) REITs could in the future provide housing cheaper as acceptable yields fall. With so much money invested will banks become less important?
Posted by: floccina at Oct 6, 2008 5:32:33 PM
Agree w/ Anarchus on Gov't creating uncertainty - I think their coyness is keeping everyone on sidelines while they see what assurances they can get. Let's wrap this up:
- $700b to buy MBS at prices where taxpayers can't lose money (~40-65 cents on dollar). Full of problems but we've crossed the Rubicon.
- systemic institutions (any left?) get the AIG deal
- non-systemic institutions go bankrupt and debtholders own the equity (thanks for the B-, Professor: http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html)
- call Paulson or Bernanke if you have a few days of solvency and want to have a deal brokered with a loan at punitive rates.
- Fed gets a ONE-TIME special Treasury run for their asset swap program w/ some mandatory haircuts in case Bernanke starts admiring FDRish experimentation a bit too much.
If that's not enough, we're in for a shock no matter what we do; we would have hurt future taxpayers enough in the process so let's take our medicine.
Posted by: Anthony at Oct 6, 2008 6:11:55 PM
So $176 billion in CP issuance is a frozen market? Or will the data tomorrow show a huge drop?
http://www.federalreserve.gov/releases/cp/volumestats.htm
Posted by: Jay at Oct 6, 2008 6:32:55 PM
Will future generations refer to the "Frank-Dodd Recession" or the "Frank-Dodd Depression?"
Posted by: Critic at Oct 6, 2008 8:42:45 PM
I proposed from the beginning that the government forget about real estate and immediatedly guarantee high-quality industrial commercial paper. The reason why we supposedly needed emergency action was because of the contagion effect in short-term lending, which the Paulson plan does nothing to address--it's too slow and too indirect. If you tell me the patient is about to bleed to death, first stop the bleeding and then see if any other actions need to be taken.
Posted by: srp at Oct 6, 2008 8:59:12 PM
I can't believe people here are still acting like powers that be wanted the "rescue package" to improve things.
How about this for a sign that things are bad. BUSH THREATENED CONGRESS WITH MARTIAL LAW TO GET THE HOUSE TO GIVE UNLIMITED AUTUORITY OVER US!
http://www.youtube.com/watch?v=gnbNm6hoBXc
Posted by: Gabe at Oct 6, 2008 10:19:02 PM
BUSH THREATENED CONGRESS WITH MARTIAL LAW TO GET THE HOUSE TO GIVE UNLIMITED AUTUORITY OVER US!
Someone is off their meds.
Again.
Posted by: at Oct 7, 2008 7:22:16 AM
Instead of merely guaranteeing CP, it sounds like the Fed will be buying it.
Posted by: anonymous at Oct 7, 2008 8:56:49 AM
nameless coward,
Which part do you disagree with?...they did threaten martial law to congressmen. The Youtube video shows one congressman talking about it on cspan. I have heard other itnerviews that confirm the story.
Or do you disagree with the "unlimited authority over us" claim? unreviewable ability to borrow against the credit of the american taxpayer any amount up to 700 billion....and then buy ANYTHIN the treasurer wants and then sell the assets to anyone they want at any price they want and not have it reviewable by congress and then buy more sceurities so long as teh total held < 700 billion = unlimited financial authority. The guidelines are so broad that they could do prety much ANYTHING they want.
so maybe you are careful not to get off your meds, but I'll keep my mind clear thank you.
Posted by: gabe at Oct 7, 2008 10:40:11 AM
Critic, CNN will do its best to get future generations to call it the "McCain-Palin Recession" (if McCain wins next month) or the "Bush-Cheney Recession" (if Obama wins next month).
Posted by: Raymund at Oct 7, 2008 10:56:38 AM
If we need the government to save the economy, does that mean capitalism has failed?
Posted by: Allan at Oct 7, 2008 11:11:18 AM
If we need the government to save the economy, does that mean capitalism has failed?
No, it does not.
Nor does the collapse of the USSR mean that communism failed.
But many people probably ought to take it that way.
Posted by: J Thomas at Oct 7, 2008 3:36:21 PM
"If we need the government to save the economy, does that mean capitalism has failed?"
Failed? Has it been tried recently? Have I missed something?
Posted by: SheetWise at Oct 7, 2008 4:46:17 PM
Sheetwise-- that is exactly what the true believing Communist kept claiming, that true communism had never really been tried. What is the difference between your claims and the communist claims.
Posted by: spencer at Oct 7, 2008 7:09:42 PM
What is the difference between your claims and the communist claims.
Not much? They're both correct.
Posted by: Careless at Oct 7, 2008 9:31:18 PM
