Fed wants new effort to “cleanse” banks hampered by toxic assets

January 14, 2009 by · Leave a Comment
Filed under: Policy News 

Here we go again, lets reward the banks for making foolish choices because printing good money and throw it at bad assets.  This sets a precedence that will encourage this to happen again in the future and it will prevent asset prices from dropping to a level that matches income so you will also punish the people who saved and made good choices by making assets more unaffordable.

This is not going to succeed because we do not have the income to support these asset price levels.  If you want to cleanse the banks, let them go into bankruptcy and have the banks that are not insolvent, come into the market and take over their assets.  According to “Lombard Street”, you prevent good banks from forming while you send money to support bad banks.  The main reason is because of “risk taking”, a bank that is not prudent, will take undo risks that in effect will make their money “easier” to be got and that makes the good banks uncompetitive.

News:

The Federal Reserve’s top two officials urged a new effort to address the toxic assets held by financial companies, warning that they threaten to prevent banks from resuming lending to households and companies.

Chairman Ben S. Bernanke and Vice Chairman Donald Kohn said in separate remarks yesterday that the illiquid investments raise questions about the “underlying value” of banks and may hinder “private investment and new lending.” They called for the government to remove or insure the assets.

The goal is to prevent the type of economic stagnation that plagued Japan in the 1990s, when banks weighed down with bad loans were unable to lend. President-elect Barack Obama has a window of opportunity to oversee a comprehensive bank restructuring plan after taking office next week.

“Banks are insolvent now,” said Paul Miller, a bank analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia, who estimates that financial institutions need an additional $1 trillion to $1.2 trillion in new help. “Until you address this shortfall, banks will continue to be credit hoarders and destroyers as they shrink their balance sheets.”

The remarks by Bernanke and Kohn came as Obama aides and legislators deliberated how to use the next half of the $700 billion financial-rescue program approved in October. Democratic House lawmakers want the Troubled Asset Relief Program deployed to help troubled homeowners, community banks and municipal-bond issuers rather than for large banks.

Source: Bloomberg

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