Saturday, August 11, 2007

Bailing out the Banks

In the ongoing discussion about Jim Cramer asking for Fed intervention into the banking crisis, this was posted in Jim's defense (H/T Instapundit):
"That's bullshit. Look, I know some people like Cramer and some don't. But, he wasn't asking for relief to save the hedge fund managers. He was asking help for people losing their homes.

Asking for Fed intervention in this scenario is not (sic) appropriate. That is the Fed's job -- to adjust the money supply based on current economic conditions. If there is a big deflationary risk due to a large number of real-estate defaults, then it makes sense to increase the money supply to ensure adequate liquidity. It seems to me that sometimes the Fed forgets that there are other risks besides inflation."
I don't get it. The Fed engages in open market operations which, in this case, is buying treasuries from banks to boost the money supply. Or it lowers the federal funds rate. Neither action helps the home owner, it helps the big banks and financial institutions by increasing the money supply and ensuring the credit markets keep functioning. Those action don't help the homeowner who overextended himself one bit.

If Cramer wanted to keep people in their homes, he would be arguing for a cash infusion directly to those homeowners at risk, not to banks and large financial institutions. Of course, the Fed cannot do that. So Cramer is asking for the Fed to bail out the big banks that offered, packaged and sold the "sub-prime" mortgage-backed securities. People are still going to lose their homes if they can't pay regardless of what the Fed does.

These big banks, hedge funds and financial institutions should face the consequences of their risky propositions. The Fed should only act to keep the credit markets fluid and open, not to engineer a bailout.

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