Tuesday, January 13, 2009

Bernanke: More bank bailouts needed

This headline is found on CNNMoney.

My hope is that Bernanke is talking about the second half of the original $700 Billion TARP money instead of an additional amount of money over and above the $700 Billion. Either way, it does not cease to amaze me how ridiculous this whole thing has gotten to be.

The country has fallen down the slippery slope. We passed the original $700 Billion after a lot of huffing and puffing. Now the $700 Billion has become the new landmark against which to compare future efforts. Obama's proposed $775 Billion stimulus package no longer sounds excessive. Do you remember how you felt a year ago when Bush proposed his $30-something billion stimulus package? Didn't it sound like a huge sum of money at the time?

Bernanke suggested that more banks and financial firms are likely to need additional capital injections from the government, and that further guarantees of their debt could be necessary, in return for the federal government receiving further equity in the firms.

Doesn't this sound like a further move towards a socialized banking system, which I'm thinking must be the intent of the Fed in the long run.

"Everything he's saying is right; we have a lot of tools and we have to use them wisely," said Barry Ritholtz, CEO and director of equity research for research firm Fusion IQ. But Ritholtz added that the bailout has already been mismanaged by the Treasury Department.

Why do we want to put the Treasury Department in charge of more taxpayer funds if the consensus opinion is that they have so poorly managed the original funds? Two wrongs don't make a right. Neither do 700,000,000,000 wrongs.

Bernanke dismissed this risk, however, saying that inflation appears well-contained in the near term. And he said despite the fact that the Fed is taking on much riskier assets than normal as collateral, he does not believe there is a major risk of having those loans go bad.
"The Federal Reserve has never suffered any losses in the course of its normal lending to banks" and Wall Street firms, he said.

Investing 101 tells us that past results should not be considered an indicator of future returns. Just because the Fed hasn't lost money in the past doesn't mean the same will hold true. It seems to me Bernanke has not come to the realization yet that this is a unique problem and the standard solutions are not necessarily going to work again and again.

This has the feel of an out-of-control driver. The car begins to fishtail, the driver over-corrects, and the car skids out of control the other direction. In this case, my biggest fear is that the Fed overreacts and the economy skids out of control in the other direction. In this case, the other direction is inflation.

A good article from CNNMoney about the potential threat of inflation can be found here.

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