EESA is a week old and already irrelevant--or at least the TARP part where the Treasury is supposed to be buying up bad mortgages and mortgage-backed securities. As world markets continue to tumble, it's clear that EESA has had little positive impact on bank lending or market confidence. We always knew that buying up bad bank assets was only an indirect way to pump up bank capital. Now, it looks like more drastic measures are afoot.
Yesterday, central banks coordinated emergency interest rate cuts in an attempt to spur lending globally. The Treasury is now considering 3 aggressive moves to get bank lending back on track:
1. injecting capital directly into banks by buying equity stakes ;
2. guaranteeing interbank debt; and
3. extending deposit insurance to all bank deposits.
The interbank debt guaranty is a UK proposal, where such a guaranty is being implemented. The move to buy equity stakes raises strong doubts as to the efficacy of last week's plan to buy up mortgage assets. Existing EESA authorization is likely broad enough to encompass purchase of bank equity stakes. EESA's definition of "troubled assets"--authorized to be purchased under TARP--includes "any other financial instrument that the Secretary . . . determines . . . is necessary to promote financial stability."
Keep your fingers crossed.
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1. Posted by Brett McDonnell on October 10, 2008 @ 8:24 | Permalink
Has Treasury yet bought a single distressed security? I know a big part of the effect was supposed to be psychological, and that's not looking so good (understatement alert), but surely part of the effect was supposed to follow from how actual purchases would affect bank balance sheets. Can we really judge that a failure before it has even started?
2. Posted by Anna Gelpern on October 10, 2008 @ 8:43 | Permalink
One big question is whether there will be coordinated backing of all interbank liabilities. I am told the price tag for all the major markets is $16 trillion, though have no independent sense of it. Any thoughts on what the G-7 might do this weekend in lieu of such a (patently unaffordable) guarantee, but with the same effect?
It has struck me that the confidence-as-big-number game appears to be up.
3. Posted by Fred Tung on October 10, 2008 @ 8:47 | Permalink
Am I being premature? Maybe, but why should I wait if the markets won't? For sure, Treasury hasn't dallied--EESA was enacted last Friday and by Monday, Treasury had issued interim guidelines on hiring of asset managers, conflicts, and procurement, as well as naming Neel Kashkari as interim head of the program. But still no faith.
Working on the asset side of the balance sheet is a very indirect way of enhancing lending capacity. In retrospect, it looks like that approach simply wasn't aggressive enough. We could wait and see, but it doesn't look like anyone is waiting.
4. Posted by fedgovernor on October 10, 2008 @ 10:57 | Permalink
Fred,
The crash started 12 months ago, and the Fed is now getting round to issuing interim guidelines on hiring managers?
Can you FEEEEEEL he confidence!
My advice has been consistent: DOW 8,000
And I'm probably being generous.
5. Posted by Usha on October 10, 2008 @ 12:34 | Permalink
Best. Blogpost. Ever.
6. Posted by Fred Tung on October 11, 2008 @ 4:35 | Permalink
I agree, Anna, the interbank debt guaranties are going to be tricky for some countries. On the one hand, once the UK steps up, it's going to be difficult for other countries not to. Capital will flee to the safe haven. OTOH, given the size of the potential commitments, some countries' guaranties may just not be credible. Perhaps a dubious guaranty is better than none at all?
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