Banking Crisis: When BS hits the Fed

News Type: Opinion — Seeded on Fri Mar 14, 2008 11:28 PM EDT

Article Source: Guardian Unlimited

business, economy, federal-reserve, banks, sub-prime, bear-stearns, lead-turkey

Steve Pearlstein of the Washington Post is a pretty smart guy, and he wrote on Thursday: "Last week, it was a $200 billion cash-for-bond swap for the banks. This week, it was a $200 billion bond-for-bond swap for the big investment houses. If they keep this up, pretty soon you'll be able to walk into any Federal Reserve bank and hock that diamond brooch you inherited from Aunt Mildred."

Actually, from today's actions by the Fed, it's worse than that. Pretty soon you'll be able to walk into the Fed and hock Aunt Mildred herself - even if she's on life support, like Bear Stearns.

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{"commentId":1580044,"authorDomain":"djehuty"}

Djehuty

My very inexpert feeling is this: debt instruments in US dollars are coming due all the time, and yet the dollar is falling against all world currencies. So if the government is to refinance it must pay higher returns to get that credit from overseas. China is already unloading dollars, so where does the money come from without causing the dollar to fall even further, or interest rates to rise?

I could very well be completely misunderstanding this. Anyone care to enlighten me?

{"commentId":1580044,"threadId":"234795","contentId":"1367749","authorDomain":"djehuty"}

1 vote

#1 - Fri Mar 14, 2008 11:37 PM EDT

{"commentId":1584889,"authorDomain":"chill888"}

chill

well no expert here but ....simple-minded analysis

As it becomes more difficult to finance the debt and twin (trade and fiscal) deficits. A few things can happen.

1. Interest rates increase as investors demand higher returns - this slows the economy (borrowing more expensive, mortgage rates increase, etc)

2. The government prints money - this leads to currency depreciation, inflation, etc

Of course vicious circles soon develop. currency deprecriates --> imports more expensive -> inflation, Fed needs to raise interest rates, rinse and repeat.

Currently it looks like the Fed is focused on lowering interest rates to spur the economy and importantly help reduce mortgage dfeaults. But lower interest rates mean further currency declines, and difficulties attracting foreign funs.

Something has to give: Print more money - probably? Scary.

PS - solutions = reduce deficits (control spending, grow the economy, etc)

{"commentId":1584889,"threadId":"234795","contentId":"1367749","authorDomain":"chill888"}

1 vote

#1.1 - Sun Mar 16, 2008 2:45 PM EDT

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Banking Crisis: When BS hits the Fed

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