There will be many turning points in this first global recession of the modern era, but this week marks one of the good ones. The players: the Fed, the Obama administration, and maybe, just maybe … the bankers.
The Fed is a central bank. All nations have one, each with one unique capability: the authority to print money. In normal times, central banks print money cautiously but routinely through the banking system — draining in good times, increasing in recessions.
In one corner of the Fed’s giant conference room hangs an imaginary but thick, red, silken rope. The kind of thing a Victorian might have used to call the butler. However, the imaginary one at the Fed has a huge, red, steel handle on the end. Since 1913, everyone visiting that room has known the rope and handle hang there, but no one ever talks about it, and all avoid even glancing at it.
Last Wednesday, Fed Chairman Ben Bernanke pulled the handle. In extremis, in a flat-out national emergency threatening economic collapse, central banks must use the ultimate weapon: Bypass broken banks and enter markets directly to buy financial assets with invented money in whatever amount necessary.
Neither media, consumers, nor markets have grasped the magnitude of the event or its power. In mortgages alone, the Fed expanded its purchase operation from $500 billion to $1.25 trillion. There is still a standoff between this irresistible force and the immovable object of refinance demand, but nobody in housing or waiting in line to refi should worry about a rise in rates. We will not decline quickly, and over time maybe not far, but we’re not going up — normal upside volatility is completely gone.
Same for Treasurys (the Fed is buying those, too). On the day Bernanke pulled the handle, the 10-year T-note fell from 2.95 percent to 2.55 percent. This week the Treasury sold $100 billion in new paper, and the 10-year never rose beyond the 2.7s.
As much trouble as the world is in, do not underestimate the power of the Fed. The administration is flinching from declaring an emergency, but not the Fed.
President Obama is still struggling for voice, sticking with his budget focus and inane assertion that this Walter Mondale dream of Christmas is essential for recovery.
However, Tim Geithner found his voice, and then some. In testimony with Bernanke before Congress, the two men in 15 minutes cut the knees from under all the populist AIG howlers in both parties, exposed their ignorance, and their grave, bipartisan, and long-term failure to craft and support regulation of the financial system. …CONTINUED
The new Term Asset-Backed Securities Loan Facility (TALF) and Public-Private Investment Program (PPIP) efforts — one to get lending going again and the other to deal with bank toxics — are under way, well-considered, and as good an initial effort as we can hope.
It will be months before we feel their effect, or even know if they work (see "big red handle," above). Geithner and his boss could have done a lot better since inauguration to describe the agenda and its timing, but that miss is history.
Then, the banks. Obama met today with the "dirty dozen" top bank CEOs, and afterward none looked chastised. Too bad. We need their institutions to survive (to get our money back), and some of the CEOs should stay in their chairs. Most Americans wish that all of them would disappear into clouds of yellow, sulfurous smoke.
I have annoyed banking friends by repeatedly demanding that somebody in authority instruct these CEOs to behave (in particular, to make loans). Here’s the deal. Gradually since the 1960s bankers lost the discipline and control asserted in the Depression, after ’29 (even mighty Jack Morgan was called to account).
These CEOs today — still, despite the emergency — have priorities ordered first to their personal ambitions, then to their stockholders, then to the nation.
Gentlemen, since 1933 the nation has guaranteed your deposits, and now all of your liabilities. We come first. Then your stockholders. Then you. Act like it. Now.
Obama & Co. must get that message across to the oligarchs, or an angry nation will.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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