In a move that shows the extent of the Fed's concern about the economy beyond the financial sector, the agency may start to buy debt from American companies.
According to The New York Times, "Under a proposal being discussed with the Treasury Department, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities." The central bank may buy commercial paper from corporations and municipalities.
The program would push the Fed's intervention too far. In entering the industrial, service, and municipal markets it would violate the spirit of its charter to control economic activity by controlling interest rates and lending money to financial companies which are under some level of regulation which comes directly from the agency.
The broader commercial paper purchases would, in essence, make the agency a local bank for financing such a broad range of business entities that they would no longer have to stand on their own. While it may help many corporations secure short term cash, the Fed has other tools to do that.
The first action that could help the short-term lending markets would be for the Fed to cut interest rates to zero. Banks would have much less risk taking on loans. The Fed could also insist that its short-term lending plan designed to help banks and brokerages come with requirements that some of that money be put into the system in the form of commercial loans.
The new Fed program would go too far by putting its hands into far-flung corners of the economy.
Douglas A. McIntyre
Reader Comments (Page 1 of 1)
10-07-2008 @ 10:18AM
Ed Doan said...
I fail to see why this is such a bad plan. Currently, the fed loans to the banks and they are hoarding their cash. The money isn't flowing into business where it is needed. The idea of nationalizing only failing banks seems like a conflict of interest, but that's where the bailout was really headed. In short, business needs cash, the banks won't loan it, and the feds are putting money in the banks in the hope they will loan some. Skip the middle man, and loan to the business sector. It's probably less risky than assuming the bank debt.
It sounds to me like you want to continue business as normal, Doug. Lowering the fed rate to zero would strip the feds of any remaining ability to control anything, and it depends on the banks doing something sensible and responsible. The banks don't have a very good track record of late.
Banks might not loan to businesses like GM that need help with cash flow to finish their entry into the hybrid market. The effect on unemployment would be huge if GM were allowed to fail just so banks would feel safer. If you have problems with GM as an example, you can pick any number of other examples. The help is a loan, not a gift, and at least you know that the federal money is going to the places that will keep folks employed.
Doug, your thinking, or lack thereof, is what has has placed us in the mess were in. Banks are very bad children that need to be taught a serious lesson. You seem to want to reward them.