Thursday, July 8, 2010

Fed worries about economic slowdown, considers taking a stimulus role

The U.S. Federal Reserve is considering taking a stronger role in boosting economic growth, with Congress deadlocked on how to cope with a troubling slowdown. Options being weighed include buying more mortgage securities and cutting interest paid to banks that are putting funds on deposit with the central bank from 0.25% to zero, giving financial institutions more incentive to loan.
The Washington Post.

As usual the Federal Government is culpablly and dangerously late in diagnosing the problem. Of course banks are not lending to the public.

They would be sued for imprudent business practises by shareholder activists. After all, it is the height of managerial irresponsibility to make loans to risky borrowers when a risk free, high profit margin alternative borrower - The US Treasury - is panting at the door.

No, Mr Geithner, any first year MBA student will identify correctly that the problem is NOT the interest rate paid to banks, it is the very incentive to replace bad mortgage assets with pristine capital so regulatory capital levels are acceptable.

Until the real problem, which is the continual drop in value of the real estate collateral that is the bulk of assets of lending institutions is addressed this kind of Govertnment meddling will make the problem worse and worse.

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