Interest Rate Roundup

Tuesday, July 15, 2008

Markets losing confidence in Fed, Treasury

After reading the "play by plays" of the Fannie Mae and Freddie Mac rescue plan in the New York Times and the Wall Street Journal this morning, I have to ask: "Where were these guys months ago? Why wasn't a mechanism put in place for some kind of rescue long ago, when the mortgage crisis started unfolding? Couldn't someone at the Fed or Treasury have foreseen that the GSEs could get in serious trouble, given their excessive leverage and their exposure to the biggest decline in the U.S. housing market in modern history? If everything was prepared in advance, it should have been a simple process of "flipping a switch" and backstopping the market.

I can't help but thing that if Fed and Treasury officials spent more time preparing for the unfolding calamity IN ADVANCE -- and less time issuing speeches about how the subprime mortgage crisis was contained ... how the problems in the mortgage world weren't too serious from a credit availability perspective ... and wouldn't spill over to the regulated banks and thrifts -- then we wouldn't have to do these hastily arranged, weekend bailout scrambles.

Am I being too tough on Washington policymakers? I don't think so. Heck, I'm not even griping about the other, multiple errors they've made in recent years: The Fed keeping interest rates too low for too long, thereby creating monetary conditions ripe for the inflation of a housing bubble ... the banking regulators not cracking down more aggressively on high-risk lending when there was still time ... policymakers denying there was a housing bubble over and over, even as many of us could see it plain as day. You get the picture.

Why am I bringing this up today? Well, this slapdash policy approach is causing international investors to lose (even more) confidence in Bernanke and Paulson, as near as I can tell. Just look at the dollar. The value of the dollar is determined by many things. But one of the most important ways to look at it is as a barometer of international confidence in the U.S. economy and its stewardship.

Right now, investors are giving these guys a big "thumbs down." The EUR set an intraday, all-time high this morning ... the AUD set a 25-year high ... the GBP is back above the 2-dollars-per-1-pound mark ... and the Dollar Index is within a few ticks of its all-time low (recently 71.50 vs. a low of 70.69 on 3/17 of this year).


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