Wednesday, October 01, 2008

Lender of Last Resort

I realized yesterday morning that the (temporarily) failed bailout was completely, COMPLETELY unnecessary. We're told this bailout has to happen or people will die, all because there's no credit, anywhere, nowhere at all, none to speak of, none! I remembered a throw-away detail from a Wall Street Journal article I read three weeks ago about the negotiations surrounding the demise of Lehman Brothers. As representatives from other firms met over that weekend and talked about a LTCM-type bailout, they decided they didn't have enough money to do it. Someone floated the idea of borrowing from the Federal Reserve, but that type of borrowing usually carries a negative stigma. The suggestion was made that, if all major financial institutions borrowed from the Fed at the same time, there wouldn't be a stigma for any of them. Ultimately, they decided against it because no one knew how bad Lehman's debt was, so no one wanted to purchase it.

We hear from all sides that credit is drying up. Congress was supposed to engineer this bailout because without it, credit could disappear. But the market already has a lender of last resort. If the Fed can't assure credit continues to exist, then it's even more useless than I suspected.

This new proposal before the Senate is worse than the bill the House voted down. Firstly, what is so hard about making sure your FDIC-insured accounts don't have more than $100K in them? Why do we need to raise the limit to $250K, and why is this proposal talked about like it will help get votes behind the bailout? Secondly, why is a massive government liability being shopped around in conjunction with tax cuts? I don't think I've ever met a tax cut I didn't like, but even I know you can't balance your books this way. Thirdly, if this is truly so needed, why are they wasting time tying it to things like tax breaks for wooden arrows intended for use as toys by children? I kid you not, that is part of this Senate bill. Is there any more fitting indictment of our current political system than the tax breaks for wooden toy arrows or "wool technology" that are being included in this bailout? Fourthly, doesn't the fact that executive pay increase oversight provisions lessen the chance that firms will participate sort of show us exactly how useless this bailout is? If they can forgo government assistance just to protect their own exorbitant pay, they can forgo a bailout no matter what. Fifthly, why were the provisions regarding date of ownership removed from the bailout terms? Foreign investors are going to receive most of this bailout money for bargain-basement deals they picked up after Lehman collapsed.

A system is in place. The Fed is the lender of last resort. Let it function that way.

1 comment:

JT said...

Right on "mr. most handsome man ever"!! Don't even get me started on how foolish this is. Let me ust say that if they increase the FDIC insured limit, you create the incentive for people to store their money in account rather than investing it in the market. While that may be good for the banks, it is a loser strategy for keeping up with or beating inflation for depositors. People have to put their money somewhere where it will provide a return which is not a savings account.

BTW - don't vote for anyone who approves of the bailout.