The joint venture funds would be able to draw on Fed Talf financing — which is a surprise concession.
That's from today's FT. Previously it had been thought that Talf was to finance new lending, not legacy assets. That's where the whoops comes in. Do you not worry that the future independence of our central bank has been tossed out the window?
I found Barney Frank’s comment that it’s about $2T too late to worry about the Fed’s virginity witty but not comforting.
I was worried that FED independence was tossed overboard 7-8 years ago. It’s way to late to express that concern. Now the mess just has to be cleaned up.
What is wrong with the simple solution of forcing banks into receivership, wiping out equity holders, and establishing new vehicles that hold all easily separable, hard-to-value assets [bonds, loans, etc], the cash flows of which vehicles pay off the existing bondholders over time? This avoids any problem of “valuing” the assets. The government could play a role in also paying out some differential cash to bondholders avoid unwinding complicated derivative positions, selling buildings, etc – recapitalize the banks equity, then do a private capital raise. This solution attaches the potential losses where they belong – to the existing equity and bondholders, and solves the problem entirely, and relatively transparently.
I’m not as worried about the Fed’s independence, as I am worried about its ability to contract money supply once the volatility of money corrects. One is an abstract issue, and the other is a sure long-term problem. Are we going to pretend that raising short-term interest rates as much as politically feasible is going to be sufficient? I mean, has anybody even proposed any novel/innovative tools for reducing the money supply, when it becomes necessary?
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