Notes from Lynda Startzman………………October 15, 2008
Federal Reserve Chairman, Ben Bernanke, speaks: "crisis will end when trust is restored."
Earlier today, Ben Bernanke, Chairman of the Federal Reserve Board spoke on the economic and financial challenges that we face. The highlights are as follows:
1. "We will get a recovery when trust is restored to the credit markets. We have a retail fear of trust of the retail investor, as well as an institutional fear."
2. "The problem is large and complex."
3. "We have tools now to solve the problem."
4. "We intend to repair and reform our financial system and regain prosperity."
5. "We acted quickly to provide credit to our economy. There was a global response to a crisis that had been with us for over a year".
6. The Federal Reserve acted on two major points. The first was to provide large amounts of liquidity. The second was to slow up the downslide by lowering its target federal loan rate to ease the stance of monetary policy.
7. "The financial crisis’ intensified over the summer, with short term funding markets becoming increasingly impaired."
Mr. Bernanke talked of the Financial Reserve Legislation that will help the further falling of the market, stating that the Federal government will work closely and actively with the Treasury.
He talked about the failure of Lehman Brothers, stating that equity prices fell sharply with withdrawal of mutual funds, causing global crisis and liquidity drying up. Households, businesses, and state and local governments are feeling the squeeze. Unemployment will be affected even more, especially in the banking industry.
One solution in force is an expansion of Federal Reserve Lending extending unlimited dollar funding to England, Japan and Swiss National, to relieve pressure on the U.S. Treasury Markets.
The new program (TARP) is aimed at stabilization of our financial markets. "ACT" allows Transfer funding that will unclog the markets for mortgage related assets.
The banking institutions that receive capital under this program will be required to cap executive compensation. In effect, it will help home loans, mortgage backed securities and provide equity to the banking system.
In addition, there will be an FDIC guarantee that will cover all non-interest bearing accounts, including payroll accounts.
The goal is to unfreeze inter banking and markets and to secure markets to unfreeze assets. This is not only for the U.S., but also around the globe.
"The road forward will not be easy." "Much work remains but we have the tools to handle it now."
****Mr. Bernanke talked about the depression of the 30’s, the react ional errors that were made then, and how we reacted differently to the current crisis. His statement is that "we did not wait to strengthen the financial system, and that we have avoided both critical errors made by the government in the 1930 financial crisis. "Early preemptive intervention is important."
He also stated though that monetary policy has its limits and that the current situation required additional firepower and the Treasury needed additional financial resources. We needed a physical intervention as well as financial intervention.
There is now in place a coordinated rate cut with the entire major central banking systems of the world.
There are great concerns with "asset bubbles" such as housing. There will be new monetary policies to prepare for this crisis in the future. "Supervisory regulatory policy is needed not just monetary policy."
The "housing bubble" was the triggering event of this crisis. People defaulting and leading to foreclosure, and when there is no credit, the economy weakens.
Note from Lynda:
Freddie Mac and Fannie Mae are still the culprits in my book. As well as inflated markets and spending. And we cannot forget all of the profit made on fees on these mortgages that were worthless anyhow. One bank would make the loans, package them up and sell them, only to buy blocks of loans of the same caliber. Who was watching these guys??? Supervision and regulations are needed, not just policy. These mortgage papers are now at bargain basement prices and not worth much.
The U.S. housing market is huge. How are they going to directly affect it and make corrections? How are they going to get cash flow back into the markets? The outstanding mortgage credit is Fourteen Trillion dollars.
We still need a greater housing relief of some kind. Not to help those that overspent, but to help stabilize the economy.
--End of opinion
Mr. Ben Bernanke also brought up the fact that businesses "too big to fail" must be addressed (i.e. Freddie Mac and Fannie Mae and others). He stated that we need market discipline and strong regulatory oversight.
"The infrastructure of the banking system needs to be strengthened so that one cannot affect another, and another and another. We need to make them less systemically critical. That is what happened with Lehman Brothers and could have kept on toppling banks had the government not put a ban on short selling. We have a systemic risk problem. We need to go back to FIDICIA of 1991, and even enlarge on a set of rules and regulations to be met, so that we can protect and guard the creditors of that institution.
From Lynda:
The old "too big to fail" system is what got us here. We need policy, procedure, and enforcement.
The way it works with short seller or hedge funds is they drive a stock down and then buy it low…and win! But someone always loses in this scenario.
This is lengthy and not all correct on quotations but meant only to inform. 'Till next time.
Lynda H. Startzman
