Friday, April 11, 2008
Fed's Portfolio Similar To Ah-Long's
The Fed's portfolio now looks a lot like an Ah-Long's (unlicensed loan sharks). The spate of lendings by the Fed means it has to borrow from someplace to lend to the distressed parties. In exchange for the loans to these "privileged children of the corn", the Fed now has car loans, credit card loan, auto loans and housing loans on their books. This literally means that there could come a time when Bernanke may be knocking on doors and asking why you have not kept up with your credit card minimum payments.
The Fed's portfolio is not a bottomless thing. As you can see, in exchange for lending to the distressed parties, the Fed now have the distressing loans in their books, what a wonderful exchange rate. Its like exchanging one ringgit for one Euro, why not?!
The debt is issued under the Fed's name rather than the Treasury's, hence they have to ask Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011. The Fed holds assets to manage the nation's money supply and influence the federal-funds rate, which banks charge each other on overnight loans. When the Fed buys Treasuries or makes loans directly to banks, it supplies financial institutions with cash; in effect, it prints money. The cash ends up as currency in circulation or in banks' reserve accounts at the Fed.
Fed officials also are investigating the feasibility of the Fed issuing its own debt and using the proceeds to purchase other assets or make loans. The Fed has never done such a thing but may consider to do so. There is a precedent here in that the Bank of Japan also did something similar. More writedowns on commercial real estate, auto loans, credit card debt, Alt-A mortgages, and pay option arms are coming. Does that mean we will see the Fed end up holding these papers??? The Fed now has to buy risky paper from the banks or lend the banks the Fed's own assets against risky assets. What if the banks fold, does that mean the Fed take up the loans and start calling up the car loan, housing loan and credit card defaulters in order to get Fed's money back?