Busted: Bankers and The Global Economy

October 7, 2008

U.S. Federal Reserve Extends Economic Lifeline

Now the Fed is loaning on “commercial paper” for the first time in history and extending credit to nearly one trillion dollars. What is next to expand the economic lifeline?

global bailout crisis

global bailout crisis

Countries scrambled to slow the growing global financial crisis today. The Federal Reserve was close behind the heels of a bad day at the stock market with a few arrows in its quiver early this morning to counter the mess that has evolved from frenzied mortgage lending and trading in unregulated financial derivatives. 

The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.

The economic lifeline credit for banking has been extended by the Federal Reserve and will reach nearly $1 trillion dollars by the end of the year.

“The sizes of both 28-day and 84-day Term Auction Facility (TAF) auctions will be boosted to $150 billion each, effective with the 84-day auction to be conducted Monday. These increases will eventually bring the amounts outstanding under the regular TAF program to $600 billion. In addition, the sizes of the two forward TAF auctions to be conducted in November to extend credit over year end have been increased to $150 billion each, so that $900 billion of TAF credit will potentially be outstanding over year end.”

The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve’s existing credit facilities to help provide liquidity to term funding markets. The U.S. Federal Reserve has focused on calming chaotic markets by creating a new commercial paper facility that buys “short-term highly rated debt,” funding corporate borrowing for the first time in history.

 

crisis worsens

crisis worsens

Today Ben Bernanke admitted that institutions including Washington Mutual and Wachovia had experienced banking runs by depositors, creating a crunch on funding. Because of the size of Wachovia and to prevent destabilization, the Federal Reserve is working to have other institutions absorb the assets of that bank without closing it down.

 

Bernanke also admitted that inflation has been elevated, reflected by the steep increases in the price of oil this year as well as other commodities, imports and higher costs of production. Until now, the Fed has been reluctant to publicly admit such a fact. However, more recently, the prices of oil and other commodities, while remaining quite volatile, have fallen from their peaks, and prices of imports show signs of decelerating. The recently falling price is due to inflation in the rest of the world lining up with the United States, although Uncle Ben didn’t specify that reality.

Uncle Ben is ever the public optimist:

“The steps being taken now to restore confidence in our institutions and markets will go far to resolving the current dislocations in the markets. I believe that the bold actions taken by the Congress, the Treasury, the Federal Reserve, and other agencies, together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery.”

Meanwhile, the pillars of high finance are giving way. The International Monetary Fund increased an estimate of global losses from the financial crisis, warning that the world’s economic downturn is quickly evolving into a global depression. Iceland, Russia and Australia are high on the list of countries working at a frantic pace to protect their banking and monetary systems.

October 4, 2008

Pork Helps the U.S. Bailout Medicine

The first bailout was largely unpalatable to Congress, largely because of the reaction of taxpayers. Their rejection of the first bailout also makes lawmakers appear responsible, careful and in control. Don’t kid yourself. A healthy chunk of pork-barrel spending makes almost any Washington legislation go down much easier.

Yesterday, the Senate tacked an additional 341 pages onto the original House bill in the form of various renewable fuel and energy tax incentives, a number of additional tax provisions, and the Wellstone-Domenici Mental Health Parity Act.

The 2008 Emergency Economic Stabilization Act contains stronger oversight protections than the three-page bill Treasury Secretary Henry Paulson offered a few days ago. That isn’t saying much though. Checks and balances are truly in question. Section 101of the bailout directs the U.S. Secretary to “prevent unjust enrichment of financial institutions…by preventing the sale of a troubled asset at a higher price than what the seller paid to purchase the asset.” Suspending accounting rules does nothing to change the value of the junk assets, allowing institutions to value their assets based on whatever scenario they like. Hmmm.

Section 104 allows for oversight by the same folks that allowed the regulatory debacle to begin with including the U.S. Treasury Secretary and the Federal Reserve. The oversight is window dressing with no direction to make the reports public or to report corruption or abuse.

The legislation in Section 107 allows the Treasury Secretary to waive “specific provisions” if he determines that “urgent and compelling circumstances make compliance with such provisions contrary to the public interest.” Nice.

What about foreclosure prevention? “…the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.” There is very little material to govern this process. There is plenty of wiggle room for problems here and very little action for taxpayers here. Government can continue to rubber stamp the actions they are making now which is pretty much nothing at all. This is not a taxpayer or foreclosure bailout by any stretch.

The Secretary must “make available to the public, in electronic form,” a description of assets including cost. Hopefully, an average person will be able to understand the information. No such provision is made. Other oversight provisions made seem to be to good effect. At least they have been thinking. Legislators have also been thinking about copious amounts of pork. A few examples are below:

Sec. 201. Deduction for state and local sales taxes.
Sec. 201. Inclusion of cellulosic biofuel in bonus depreciation for biomass ethanol plant property.
Sec. 211. Transportation fringe benefit to bicycle commuters.
Sec. 301. Extension and modification of research credit.
Sec. 308. Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands.
Sec. 309. Extension of economic development credit for American Samoa.
Sec. 317. Seven-year cost recovery period for motorsports racing track facility.
Sec. 323. Enhanced charitable deductions for contributions of food inventory.
Sec. 324. Extension of enhanced charitable deduction for contributions of book inventory.
Sec. 325. Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds.
Sec 502. Provisions related to film and television productions.
Sec. 503. Exemption from excise tax for certain wooden arrows designed for use by children.
Sec. 504. Income averaging for amounts received in connection with the Exxon Valdez litigation.
Sec. 601. Secure rural schools and community self-determination program.
Sec. 602. Transfer interest earned to abandoned mine reclamation fund.
~ E. Manning

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