FED covering bad debts

Clytus

This is most likely gonna restore alot of confidence in the financials, but it just seems to strike me as comparable to taking a Panadol for a headache...or will everyone have lernt a lesson and never again lend frivolously?


How long or how much can the Federal reserve continue supporting the major American Financials?

$500-800 billion dollars is unbelievable.

stepbar

Clytus wrote: »

This is most likely gonna restore alot of confidence in the financials, but it just seems to strike me as comparable to taking a Panadol for a headache...or will everyone have lernt a lesson and never again lend frivolously?


How long or how much can the Federal reserve continue supporting the major American Financials?

$500-800 billion dollars is unbelievable.

I wonder what the long term repercussions of this move will be. What is becoming glaringly obvious is that the US Gov now need to get their hands dirty and do a job on regulating these banks.

BuffyBot

Hmmm - this might be better in Economics, really. I'll move it over and let the Economics mods decide if they want it

Clytus

It might very well be for the better good...but is the FED just giving a temporary relief to a far more deep rooted problem within the Financial system.

The Banks need to be truthful completly now. Once we know how bad the rot is...we can then chose the best way to fix it...i.e give an antibiotic....or just chop it away!!

SoCal90046

Clytus wrote: »

This is most likely gonna restore alot of confidence in the financials, but it just seems to strike me as comparable to taking a Panadol for a headache...or will everyone have lernt a lesson and never again lend frivolously?


How long or how much can the Federal reserve continue supporting the major American Financials?

$500-800 billion dollars is unbelievable.

The details aren't yet public, but it's highly unlikely that the Federal Reserve would assume the bad debt. It seems more likely that a new federal agency under the Department of the Treasury would be created. It's also probable that this new agency, learning from what the Fed did with AIG, would likely enter into an arrangement what would be, to some extent, punitive to the institutions that offload paper.

nesf

The Economist's take on it for those who are interested: http://www.economist.com/daily/news/displaystory.cfm?story_id=12280618&fsrc=nwl

The Financial Times': http://www.ft.com/cms/s/0/0b03d81e-8730-11dd-93d9-0000779fd18c.html?nclick_check=1


Personally I'm drawn to the line of reasoning the Economist applied to the AIG rescue. Sometimes it's better overall to leave a financial institution fail in order for bankers to learn caution, other times like with AIG with the problem section only being a small part of its business and where letting it fail would hugely impact on sectors other than the financial one (in AIG's case it would have affected a lot of ordinary people's insurance cover for instance, and to let the bank fail would remove this cover from them) then the damage from letting it fail might outweigh the damage from saving it.

It may be a case where the financial system has tied itself up into a knot that to let unwind on its own would cause major damage to the country's economy and where the financial cost of saving them from this might be cheaper. I'm unsure if in incentive terms whether such a broad bailout will be good in the long run.

Flamed Diving

I think the optimal scenario is to allow the bank to be sold off to a larger bank on the cheap, with the aid of the NCB. That way, the shareholders bear the brunt of the costs, and the systems loses an inprudent bank.

nesf

A little comic relief for people: http://sinfest.net/archive_page.php?comicID=2938

Économiste Monétaire

Here's a link to the economic proposal: Click here