The financial market disruption has reached a new level of mayhem. Margin calls abound and Bear Stearns is being bailed out by the Fed via J P Morgan. Like Willem Buiter, I puzzle over the wisdom of the Fed's action. Inflationary expectations are rising and gold, the ultimate inflation hedge, is touching $1000 per troy ounce. It seems to me that inflation targeting is dead. Central banks have tacitly decided to inflate their way out of a prolonged recession. Consumers and companies have caught on. Problem is, we're not fundamentally in a liquidity crisis but a market for lemons. The problems are lack of transparency, information and the inability to assess default risk. Pumping in liquidity doesn't solve these problems. Indeed, it may exacerbate them by propping up unsound institutions that would otherwise go bust - finally providing the market with some information. Seems to me we are headed toward a classiic liquidity trap.
At any rate, back to Bear Stearns and Willem Buiter's list of questions:
"Why hasn’t the Fed declared “unusual and exigent circumstances” yet, so non-deposit-taking financial and other institutions in need of liquidity (like Bear Stearns) and blessed with eligible collateral can go directly to the discount window?
Why was Bear Stearns offered the Fed lifeline rather than being left to sink or swim on its own? What were the systemic stability concerns that prompted this intervention to assist a non-deposit-taking institution?
If Bear Stearns was deemed too systemically important to fail, why was it not taken into public ownership, preferably at a zero price?
What are the securities the Fed is, directly or indirectly, accepting as collateral from Bear Stearns?
What is the interest rate charged on the loan?
How are these securities valued?
What is the haircut applied to this valuation"
At any rate, back to Bear Stearns and Willem Buiter's list of questions:
"Why hasn’t the Fed declared “unusual and exigent circumstances” yet, so non-deposit-taking financial and other institutions in need of liquidity (like Bear Stearns) and blessed with eligible collateral can go directly to the discount window?
Why was Bear Stearns offered the Fed lifeline rather than being left to sink or swim on its own? What were the systemic stability concerns that prompted this intervention to assist a non-deposit-taking institution?
If Bear Stearns was deemed too systemically important to fail, why was it not taken into public ownership, preferably at a zero price?
What are the securities the Fed is, directly or indirectly, accepting as collateral from Bear Stearns?
What is the interest rate charged on the loan?
How are these securities valued?
What is the haircut applied to this valuation"
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