How Institutions Respond

Based on the last ten days, as the Federal Reserve lowered the discount rate (the rate charged to banks) and the Treasury Secretary announced his policy to force high cost, interest-bearing preferred stocks into targeted banks, whether they need it or not, I thought you’d like to see some interesting quotes. Nine big banks got slightly better terms from Treasury, by the way.

The intention was to infuse capital into the system so that businesses could bank receivables, families and students could access loans for college, payrolls could get funded, etc. Trickle down theory at its best. What have the banks done? Borrowed to the hilt, and hoarded the money by lending it back to the federal government – they bought treasuries. No trickle down. No liquidity. No capital available for loans. Credit market still frozen solid.

The government has said they can’t force loans to be made: “There is no express statutory requirement that says you must make this amount of loans,” said John C. Dugan, the comptroller of the currency (federal government). So we just created the “cushion” banks need to sit on to make up for their earlier stupidity, but the ordinary person is simply out of luck? And that’s all the government can say?

With all of the complexity of this combined regulation, the exceptionally complex bank structure fomented by Treasury (plus bankruptcy, litigation, etc.), here’s a comforting headline from an online October 15, 2008 article in the ABA Journal (American Bar Association): Lawyers Hope Bailout Bill ‘a Full Employment Act’ for Law Firms.

Is the government doing the right thing? You be the judge. The Dow opened down this morning, some say because of lousy home construction data. What a surprise!

I’m Peter Dekom, and I approve this message.