Even as PDCF use is waning, Bernanke Says Fed May Continue Lending Into Next Year.
“The Federal Reserve is strongly committed” to financial stability and is “considering several options, including extending the duration of our facilities for primary dealers beyond year-end,” Bernanke said in a speech to a conference in Arlington, Virginia.
Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank. The Treasury should “take a leading role in any such process” in consultation with regulators, he said. Such a resolution mechanism may help reduce concern that investors and dealers begin counting on Fed aid in case their bets go wrong.
Securities firms have cut back on their use of the programs in recent weeks. The balance of loans outstanding from the PDCF dropped to zero as of July 2, the first time that’s happened since the program began. On March 26, the end of the first full week of operation, the PDCF had a balance of $37 billion.
Bids in the TSLF’s weekly auctions, in which dealers swap securities such as mortgage-backed debt for Treasuries from the New York Fed, have declined since the start of the program. In the July 3 operation, firms submitted bids for $26.1 billion out of $50 billion of Treasuries offered.
Bernanke’s comments on the resolution authority are in line with Treasury Secretary Henry Paulson’s July 2 statement that “any commitment of government support should be an extraordinary event that requires the engagement of the executive branch.”
FDIC Chairman Sheila Bair has also said an agency should be given such liquidation authority for investment banks. The FDIC has that power over lenders whose deposits it insures. In the case of commercial banks, the use of taxpayer funds in an emergency requires the approval of two-thirds majorities of the FDIC and Fed boards, and of the Treasury secretary in consultation with the president.
“Despite the complexities of designing a resolution regime for securities firms, I believe it is worth the effort,” Bernanke said today. “In particular, by setting a high bar for such actions, the adverse effects on market discipline could be minimized.”
Bernanke endorsed several ways for the Fed and other U.S. agencies to gain more oversight of investment banks and financial markets. Congress should legislate “consolidated supervision” of investment banks and other big securities firms, with the unspecified regulator having authority over capital, liquidity holdings and risk management, he said.
The Fed itself should also get “explicit oversight authority” over payment and settlement systems, putting the Fed on par with counterparts from around the world, Bernanke said.
Congress may consider giving the Fed responsibility for “promoting the overall stability of financial markets,” Bernanke said. Still, “it would be particularly important to make clear that any government intervention to avoid the disorderly liquidation of firms on the verge of bankruptcy should use clearly defined tools and processes,” he said.
Misguided Calls For Activism
These proposed new powers, like the alphabet soup of temporary lending facilities (TAF, PDCF, TSLF) all created on the fly, are yet another round of Misguided Calls For Activism.
The Fed with help from Congress and the Bush administration created this mess, and instead of getting rid of the Fed, proposals are flying from every corner for the above parities to give the Fed still more tools in which to wreak havoc.
Now there is an open proposal, “only for emergencies, wink-wink”, to use taxpayer money to bailout banks. Instead, what needs to happen is for insolvent banks to fail. We are in this monstrous mess because the Fed, attempting to bail out its banking buddies in the wake of a dot-com crash, decided the way to do it was blow an even bigger bubble to reliquify banks.
That operation “succeeded” by creating the biggest housing bubble the world has ever seen. However, the patient is now on the death bed. And just as you do not give heroin to addicts to cure them, you cannot and should not even consider injecting taxpayer money into banks that quite literally deserve to go under.
Sloshing money around does nothing but zombify banks, while further depleting the pool of savings that should go to more productive uses. Inquiring minds may wish to consider Night of the Living Fed for an analysis of the Fed’s role as pawnbroker, why such misguided policies are bound to fail, and what the real solution to this mess is.
Instead, and in strict accordance with the Fed Uncertainty Principle, the Fed wants sweeping new powers.
Corollary Number Two:
The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Mike “Mish” Shedlock
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