Busted: Bankers and The Global Economy

April 3, 2008

Bernanke’s Optimism Flags

Filed under: banking, federal reserve, government, money — Tags: , , , , , , , , , , — digitaleconomy @ 12:04 am

bernanke-defends-fed.jpgBernanke appeared less amiable and quietly confident as he spoke is more tense tones. He admitted that “recent actions appear to have helped stabilize the situation somewhat”, but that markets remained strained. Clearly Chairman Bernanke put a new floor under the U.S. economy. The economy would be rife would failure if the Fed had not gradually opened the floodgates of the market credit and proceeded to make an emergency infusion upon the failure of Bear Stearns. Last month alone, the Fed credited more than $300 billion in economic support to keep the banking economy in functional condition.

Bernanke recited that bankers were unwilling to loan to each other because of the large amount of securitized banking instruments on hand. Banks have been unwilling to take any changes holding bad debt or collateral. Since the Federal Reserve has been dealing with the securities, clearly the Fed now is subject to holding some of that bad collateral, if only for a short time. This gives the banking community some time to breath and the capital to further expand reasonable banking opportunities.

Bernanke also noted much less credit is available for commercial real estate, in large part because almost no commercial mortgage-backed securities have been securitized. This would indicate that commercial mortgages are still very much under the authority and restriction of individual banking institutions. He expects this to make credit for commercial mortgages tighter for the time being despite the funding measures of the Fed.

The effects of the financial strains on credit cost and availability have become increasingly evident, with some portions of the system that had previously escaped the worst of the turmoil–such as the markets for municipal bonds and student loans–having been affected. Another market that had previously been largely exempt from disruptions was that for mortgage-backed securities (MBS) issued by government agencies. However, beginning in mid-February, worsening liquidity conditions and reports of losses at the GSEs, Fannie Mae and Freddie Mac, caused the spread of agency MBS yields over the yields on comparable Treasury securities to rise sharply.” Finally, Bernanke confirms the flagging bond market, heavily affected by market disruptions and improprieties by bond rating companies.

For the first time, Bernanke admitted that inflation is a real concern, although he expects inflation to moderate later this year.

Bernanke admitted the demise of Bear Stearns raised difficult questions of public policy. “Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company. Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets. With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence.

bernanke-congress.jpgHe admitted that in response to the further weakening of economic conditions, the Federal Reserve has continued to ease the stance of monetary policy. The media states that Bernanke is under scrutiny for bailing out Bear Stearns which is a landmark break in tradition. The media says that Congress is concerned how far the Federal Reserve plans to go with any future bailouts. The symptoms of the banking crisis are very difficult to deal with as the economy has appearance of a shadow regulatory and banking system, indicating fraud in the extreme. Risk management seems to have become virtually non-existent in a real-world way. As a international banker with a global scope, Bernanke and the Fed were clearly looking at a global picture when bailing out Bear Stearns. Mr. Bernanke has more reporting to lawmakers today. Perhaps he will actually mutter the “r” word in referring to the reality of the U.S. economy. Time will tell.

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