The Japanese Experience Looks To Be The Fed And Treasury Play Book

The quantitative easing game is on.  When you step back and think about this logically, it all makes sense and is quite simple really.  What did we learn from Japan? They lost a decade but they did not lose their entire financial system and throw their nation into Armageddon and chaos.

The Japanese experience looks to be the Fed and Treasury play book.  It is the lesser of all evils. Hey, if it only costs a decade or two but some point in the future the nation pulls out of this mess, then game won. Remember, even though we will be weak, everyone will likely remain much weaker.

The banks have the same game plan, which is why they are not lending.  They know that if they reign in the lending, de-lever and raise cash the firm will be around 10 years from now.  When the storm passes they can poke their heads out and rebuild.  At least they are in business. This same strategy is being deployed at the smart hedgefunds and has been for some time - just live to fight another day.

The shame is that since Subprime started blowing a gasket in Dec 2006 through just a few months ago, the company line was to deny this problem existed and call it ‘contained’.  For a year and a half I was reading very smart people warning of this very outcome. But they were all called ‘alarmists and fear mongers’.  Heck, Peter Schiff was laughed off CNBC more times than I can count. Nouriel Roubini was called a quack until very recently.

There was plenty that could have been done to prevent it from going this far over the past year and a half.  Now it is likely too late and all of us are going to pay for this for a long, long time. This is depressing - no pun intended.

Fed Commits $800 Billion More to Unfreeze Lending

By Scott Lanman and Dawn Kopecki

Nov. 25 (Bloomberg) - The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.

The central bank will purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.

With today’s announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers hope the initiatives will bring down the interest rates on mortgages and consumer loans, offsetting the withdrawal of private-sector financing.

“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and Federal Home Loan Banks after the yield premiums on those securities jumped. It will also buy up to $500 billion of mortgage-backed securities issued by Fannie, Freddie and Ginnie Mae, a government agency that insures bonds.

Source: Bloomberg - Fed Commits $800 Billion More to Unfreeze Lending

Subscribe by RSS Subscribe by Email