Interest Rate Roundup

Tuesday, November 03, 2009

Congress to pressure Fed to keep helping housing? Plus: Why can't our regulators stand up to TBTF banks?

There are a couple of interesting stories worth mentioning this morning. The first is from Bloomberg, which talks about the possibility of Congress pressuring the Federal Reserve to continue its housing and mortgage market support next year.

My take? The idea that the Fed will pull back proactively, or will stand up to political pressure, is a total joke. The Fed has become totally politicized, working hand in glove with the Treasury in the past year. There is no way in you-know-where they'll stand up to pressure to keep supporting the housing market early next year, should that pressure be brought to bear.

More from Bloomberg:

"Federal Reserve Chairman Ben S. Bernanke is gambling that come March, he can stop the purchases of mortgage-backed securities that have propped up the U.S. housing market. Congress may have other ideas.

"The central bank says it must eventually withdraw its unprecedented economic stimulus to avoid a surge of inflation as a recovery takes hold. Plans to buy $1.25 trillion of housing debt are the centerpiece of its program to pull the nation out of the worst recession since the 1930s.

"Bernanke, who convenes a meeting of the Federal Open Market Committee today, is counting on private investors to fill the void left by the Fed when its purchases end. If he’s wrong, he may come under pressure from politicians to maintain support for housing or even extend credit programs for small businesses and consumers. That would threaten the Fed’s ability to conduct an independent monetary policy.

“The nightmare scenario for the Fed would be to see them try to sell their mortgage portfolio, and Congress steps in and tries to stop it on the grounds that the housing market hasn’t fully recovered,” said Ethan Harris, head of North American Economics at Bank of America-Merrill Lynch in New York. “The attempts to influence the Fed in the exit strategy will be pretty strong.”

"The Fed chairman has already come under pressure from lawmakers including Senate Banking Committee Chairman Christopher Dodd of Connecticut and Representative Paul Kanjorski of Pennsylvania, both Democrats, to aid car companies and provide more credit to commercial real estate."

The second article is in the Washington Post. It talks about how the U.K. is trying to shrink the size of its "Too Big to Fail" banks, forcing them to sell off assets and reduced their overall footprint in order to get more aid.

Here in the U.S., though, our regulators continue to suck up to the TBTF companies. The Obama administration has essentially ignored the advice of Bank of England governor Mervyn King, former IMF Chief Economist Simon Johnson, and even one of its own advisers, former Fed Chairman Paul Volcker. They all think it makes sense to tame these behemoths before they blow themselves up again ... and require even more taxpayer-funded bailouts.

More from the Post:

"The British government -- spurred on by European regulators -- is forcing the Royal Bank of Scotland, Lloyds Banking Group and Northern Rock to sell off parts of their operations. The Europeans are calling for more and smaller banks to increase competition and eliminate the threat posed by banks so large that they must be rescued by taxpayers, no matter how they conducted their business, in order to avoid damaging the global financial system.

"The move to downsize some of Britain's largest banks comes as U.S. politicians are debating whether American banks should also be required to shrink. The Obama administration has maintained that large banks should be preserved because they play an important role in the economy and that taxpayers instead should be protected by creating a new system for liquidating large banks that run into problems. But Britain's decision already is being cited by a growing chorus of experts, including prominent bankers and economists, who want the United States to pursue a similar approach."


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