Jim Bianco was a guest host on Europe’s Squawk Box yesterday discussing the Federal Reserve meeting and its inflationary implications. Click on the picture above to see the video.
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The Financial Times – The Fed rips up the rule book
We are flying blind. The Federal Reserve’s announcement this week that it was abandoning conventional rate measures in favour of directly propping up lending represents a bold experiment in policy. Ben Bernanke, Fed chairman, is taking a gamble – but he had little choice. Aggressive easing, however, creates its own difficulties. The US real economy is crumbling and continues to deteriorate; the global downturn has been exacerbated by a crippled domestic financial system. Credit is not flowing to consumers and businesses because risk spreads are too high.
Comment For those who haven’t noticed, the Federal Reserve and Treasury have been “flying blind” for quite some time now. Just look at some of the facilities created so far in an effort to combat the credit crisis: the TAF, TSLF, TARP, TLGP, and the TALF. In case you were wondering, there are 17,576 different four letter combinations that start with the letter “T”. Does this mean we have 17,571 bailouts to go?
In addition to the programs that start with T, there are the PDCF, Interest on Reserves, ABCP MMMF Liquidity Facility, CPFF, MMIFF, Maiden Lane LLC, Maiden Lane II LLC, Maiden Lane III LLC, CPP, SSFIP and EESA. In total we count 16 programs and do not think we missed any.
Does anyone really understand all this stuff? Do Paulson and Bernanke understand it?
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The Financial Times – Clarity is needed in the Fed’s new world
Here the Fed will continue to pursue two complementary strategies. The first is partially to substitute for private intermediation by directly lending funds to certain classes of borrowers. Given that it can obtain funds at a lower cost than the financial institutions in distress, the Fed can in turn lend them out at a lower rate. The Fed’s plan to purchase agency debt and mortgage-backed securities, which made a path-breaking appearance in the statement, reflects exactly this kind of strategy. The second approach, in conjunction with the Treasury, is to try to repair damage to private financial institutions directly through equity injections and temporary guarantees. In this new era, central bank communication will surely be more challenging. To date, the Fed’s lending facilities have largely worked to contain and moderate credit costs in certain sectors, as opposed to sharply reducing them. To make further progress it may be necessary not only to expand the facilities, as the Fed’s statement indicates, but also to build investor confidence by clarifying exactly how these programmes will affect the economy.
Comment The concept of clarity is one that the Treasury and Federal Reserve have struggled with mightily throughout the credit crisis. One needs to look no further than Paulson’s flip-flopping on the issue of capital injections into banks in October to understand that even the Treasury is flying by the seat of its pants. When the Treasury and Federal Reserve do not even know what they are doing from one moment to the next, how can they effectively communicate their actions to the market?
As we detailed yesterday, the FOMC statement added a bit of transparency for future policy by mentioning that, “the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”