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« ETF Update: When Cash is King | Main | Why the Multi-Day Market Crash? »

October 06, 2008


gaius marius

i agree that incrementalism is most often good, prof -- but i do think there is room for measured criticism of policy responses so far. particularly in the interbank lending market, where the fed's facilities have effectively crowded out private lending because the fed isn't lending "freely at a punitive rate". in offering secure financing too cheaply, now they've got a huge slice of the interbank market with no good plan to wean banks off -- creating significant credit risk for the fed.

it seems to me that they've (accidentally?) created the need to either bail out the fed with the paulson plan -- directing treasury asset purchases to banks who have participated in the TAF in order to relieve the fed of their exposure -- or create a new capital-injection facility to protect the fed from TAF failures that would stick the fed with shoddy collateral.

and now this CPFF, which looks totally necessary to me to prevent cascading non-financial failures -- but also represents an acknowledgement that letting lehman and wamu fail exposed the reality of large capital shortfalls on mismarked portfolios that can wipe out most of the capital structure in liquidation. fear of that won't abate with the CPFF, i suspect, leaving the fed with a huge pile of CP to buy -- and risk that expands into non-financial failures associated with consumer retrenchment.

would you agree that financials need capital to restore confidence and can't raise it except on the most uneconomic of terms? if so, isn't an explicit RFC the destination -- even if it can't restore the good old days of irresponsible lending? and so why dither with the increments, allowing time to foment panic and worsen the damage that will need to be repaired?


"We now have an interesting situation where those who were the biggest opponents of the plan are asserting that it will not work. "

One of the biggest supporters (of a purchase at market price plan) too warns that it might be inadequate, though he's not calling for the RFC-type intervention that others are yet.

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