What's Bernanke Smoking?

CNBC: The Federal Reserve on Tuesday announced it is ramping up efforts to provide more relief in the spreading credit crisis, saying it will make up to US$200 billion in cash available to cash-strapped financial institutions. The Fed said it will lend the money to financial institutions for a term of 28 days, rather than overnight. The action is being coordinated with central banks in other countries to try to provide help in a global credit crises that threatens to push the U.S. economy into its first recession since 2001 if it hasn't already.

"Pressures in some of these markets have recently increased again," the Fed said in a statement. "We all continue to work together and will take appropriate steps to address those liquidity pressures." The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank. In addition, the Fed has authorized increases in existing programs called 'swap lines' with the European Central Bank and the Swiss National Bank. "These arrangements will now provide dollars in amounts of up to US$30 billion and US$6 billion to the ECB and the SNB respectively," the Fed said, extending the term of these swap lines through Sept. 30.

The new lending initiative "is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally," the Fed said. Its announcement said that securities will be made available through an auction process on a weekly basis beginning March 27. The new program, called the Term Securities Lending Facility (TSLF), is geared to provide primary dealers -- big investment firms that trade directly with the Fed -- with short-term loans. They would pledge other securities -- including federal agency debt, federal agency residential-mortgage-backed securities -- as collateral for the loans. The loans would be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008.

The Fed since December has been making short-term loans available to banks through a new auction facility. It has provided US$160 billion available to squeezed banks in hopes it will help them to continue lending to individuals and companies.

The Fed has been working to pump billions of dollars into the banking system to aid an economy rocked by the subprime mortgage crisis and the severe tightening of credit.

A meltdown in the housing and credit markets has made banks and other financial institutions reluctant to lend to each other, causing a cash crunch. Financial companies wracked up multibillion-dollar losses as investments in mortgage-backed securities soured with the housing market's bust. Problems first started in the market for subprime mortgages-- those made to people with blemished credit histories. However, troubles have spread to other areas.

The picture worsened just after the Fed's announcement Friday, when the Labor Department released a report showing employers slashed another 63,000 jobs in February, the most in five years.

Comments:

a) US$160bn not enough, now US$200bn. Why is Bernanke doing this? It appears he is beholden to the big banks, when his real priority is a ensuring growth with minimal inflation. If it was Paul Volcker, he would have asked the banks to f.o.

b) It also appears that Bernanke is very keen NOT to let the stock indices fall further. When did that became the Fed's priority? Does the entire Federal Reserve board have a lot of stocks? Even if they do, its not their business to save the stock players.

c) If the motive is to save ailing banks and mortgage businesses from folding - is it really in the interest of a well run economy NOT to allow them to fail? This is reminiscent of Japan's credit implosion in early 90s, where nothing moved, nobody called on each other's debts. Till today, the economy is still working off the excesses, more than 15 years of stupidity.

d) When there are bubble, the market will self-correct, and they need to correct. The Fed should step in to facilitate an orderly correction, not manipulate or delay or stave off the needed correction. Not allowing things to correct will ensure problem credit still being pervasive within the system, and actually pumping liquidity will ensure the bubble is being reflated and will rear its ugly head again soon.

e) Its also ethically wrong not to punish the banks who made the mistakes, or rather allow the banks to be punished by the markets. Banks lend aggressively and recklessly, and they pocket the fees and trading profits. Due to the recklessness the markets imploded, now they come running to the Fed to rescue them from the mess. Where is the logic and sensibility? This also presents an unfair treatment of investment pros who shorted or betted that the credit implosion would come about - they deserve their gains for being right, what kind of casino is this - red the banks win, black the banks don't really lose??!!

p/s the photo is the underbelly of a unique stingray