The Fed announced today that it would start issuing its own bonds, rather than going through the treasury. It’s hard to be sure of the exact number, but I’m guessing somewhere in the area of 4 or 5 trillion dollars worth, unless it wants to just print money.
Before this, the Fed was having the Treasury issue debt for it, but unfortunately, that money is restricted by the Federal debt ceiling, and getting Congress to increase that debt ceiling by a few more trillion would be politically explosive.
As I noted October 8th, when the Fed started buying up short term commercial paper, the Fed is steadily moving towards becoming a national bank. The bottom line is that banks are pulling back on lending. When the Fed or the Treasury gives them money, instead of using it to lend to business and consumers, they horde it or use it to pay down their losses. They have been increasing interest rates on credit cards, pulling or reducing lines of credits to businesses and just generally lending less and less, even as a huge flood of money gushes from the government into the bottomless pit of their greed and need.
So: lending less money, and charging higher interest rates for it. Not what the economy needs going into a huge recession, and completely frustrating Fed monetary policy. Rate cuts are not being passed on to most businesses and consumers.
There are two ways to get through this.
The first, which I’ve repeatedly suggested, is to nationalize some banks that are failing (like, oh, Citigroup) and use them to lend directly to businesses, consumers and on the overnight bank loan markets at rates the Fed and FDIC set. Other banks can either match rates, or lose customers. And even banks do need customers.
The second option is one the Fed seems to be backing into haphazardly. If banks won’t lend, the Fed can. Given the way the Fed has moved to prop up consumer debt markets, by buying up packaged consumer loans, it’s debt facilities to banks and so on, the Fed has already started down the road.
But what they’re finding is that buying and lending on the secondary markets isn’t working. Sure, lenders will take the money, but they won’t pass on the low rates to consumers, or even necessarily pass on the money. So while buying short term paper has stopped the market from collapsing entirely, it has only slowed the contraction and has not led to improved credit at lower rates.
Which means the next logical step is to just bypass the banks entirely and start letting businesses have Fed lines of credits. And as my friend Stirling and I were joking the other night, hey, why not start issuing Fed credit cards at prime +10%. The Fed will make lots of money, consumers will no longer be gouged by banks, and there’ll be credit. Get some card stamping machines, and set up a customer service department, and soon, you too can argue directly with the Fed about whether they should charge you for that hotel room you say you never slept in.
Sound far fetched? Probably it is, which is why the new administration will have to fail to clear the financial crisis by other means before finally backing into it.
But hey, how cool would it be to have a Platinum Fed Card. "For everything else, there’s the Fed. When you need credit, why go to other banks, go to the only bank allowed to print money."