Fed Reserve to Bail Out Subprime Lenders
It is impossible for rich people to not make money under the Bush/Castle economic system in which every bad decision is rewarded and every failure is papered over by saps like you and me who actually pay our taxes.
Aug. 10 (Bloomberg) — The Federal Reserve added $19 billion in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash amid a rout in bonds backed by home loans to riskier borrowers.
The Fed accepted only mortgage-backed debt as collateral for this morning’s weekend repurchase agreement. Losses in U.S. subprime mortgage investments have been rippling through global credit markets, driving interest rates higher and sinking share prices. The Fed also added $24 billion yesterday, the most since April, as demand for cash increased.
The New York Fed’s additions lowered the Federal funds rate to 5.375 percent, according to ICAP Plc, after it began trading at 6 percent, the highest opening rate since January 2001. The Fed’s benchmark overnight rate is currently 5.25 percent.
How much do you know about the Fed?
Aided by the infamous banruptcy “reform,” the mortgage crunch is creating an ever-expanding permanent class of sub-prime borrowers who are perfectly eligible for credit, but only at inflated interest rates. Basically the credit industry is increasing its average vigorish, while never being held to account for its lending practices.
Don’t kid yourself about how borrowers should be more responsible. Lenders have perfectly accurate algorithms for predicting and avoiding these kind of risks (hello, MBNA!!). But the bankruptcy protections repeal allowed the banks to ignore traditional controls and push their risk curve out.
I know enough about the Fed.
The Fed had no choice. They had to step in to avoid a broader bloodletting in the economy.
And $19 billion is peanuts for open market operations. But it’s probably just the beginning. And the Fed can’t keep doing it forever, because the more funds they inject, the more they risk tanking the dollar, which is already hanging by its toes. The Fed is on very thin ice here.
The “bailout” from the Fed is not traditional money like an appropriation. The Fed basically buys the bad debt and as payment, deposits reserve “funds” in the bank’s reserve account. This is not real money, but is rather an authorization for the bank to continue lending up to its reserve ratio.
But Jason is right in the broad sense. The accountability for the lenders will be light. And the cost of the bailout will ultimately be borne by consumers.
Thank you.
The bottom line is that Republican policies have created an “accountability free zone” in which the rich and well connected can make bad loans, start wars, and pretty much screw everything up while never feeling the downstream impact.
miles — Is the Fed giving out taxpayer dollars, like Jason alleges?
the cost of the bailout will ultimately be borne by consumers.
In. Your. Face.
Jason didn’t allege that. As an accomplished alligator, you should realize that.
But it is a bailout nonetheless. Due to non-performing loans, real money from loan repayments stopped coming into the banks, and the banks reached their limits on what they were allowed to lend based on their reserve ratios.
So to prevent the banks from severely tightening their lending rules, or from stopping lending altogether, the Fed deposited new reserve funds to allow them to continue lending.
“Reserve deposits” are (usually) not real money, but rather are the means by which the Fed creates real money.
The banks issue new loans based on their reserve deposits, and those loans are repaid with real money from the real economy. That is how the Fed turns debt into money.
It is an amazing thing. It works fairly resiliently until you push it too far.
And the cost of the bailout will ultimately be borne by consumers.
To be fair, some investors are going to get burned too.
Screw ’em.
We can’t let the banking system fall apart. What’s happening here is relief not for those who shouldn’t have been given loans, but relief for the banks and investment houses who thought they could make money off sub-prime loans.
Again; we can’t let the banks go down. But we should have structured the deal so that these ‘big boys’ who thought they could make a bundle on bullshit loans have to pay it back over the course of the next decade or two at a reasonable interest rate.
Also, typically in a mid-sized crisis like this the Fed will make backroom deals to spread the cost of the bailout around the banking world. They all know they sink or swim together and sharing bad fortune is not all that uncommon. You probably won’t hear about it until after the fact.
But if the crisis expands the banks will no longer be able to keep up by injecting funds or moving funds around.
So far it all seems containable.
But if the crisis
it’s more like WHEN actually….
Looking at recent events puts to mind a familiar set of events back in 1919.