Tuesday, April 20, 2010

Couldn't have said it better myself

On today's NYT op-ed page there is a piece by William D. Cohan entitled "You're Welcome, Wall Street". While it could just as easily encompass the entire financial services industry and not just the big target Wall Street, everything else in the commentary is just right. The subject is the maintenance by the Fed with the support of the Treasury Department of historically low, or very short term no, interest rates and the damage that is doing to the economy and to middle class Americans. It's a subject that's been mentioned here many times.

This over-extended policy "rewards" conservative savers with no interest income, hits those on fixed incomes, as in retirees, particularly hard, and provides the banking system more profitable liquidity than it possibly needs. It encourages risk taking by those that can least afford it by sending them out looking for investments with any yield or hope of a higher return. When the bond market finally turns these unhedged retail investors will see carnage once again.

The rationale for this policy is that, once so badly broken, the credit markets need a chance to heal to return lending and credit availability to higher levels. That's not going to happen any time soon and it has nothing to do with whether a money market account yields 2% or 2 basis points. The administration and the Treasury department and regulators have pursued a schizophrenic path, demanding that financial institutions provide much more credit to the economy while zealously tightening the screws on balance sheet quality in the regulatory audits. The former approach is transparently political and the latter punitive. Most financial institutions are understandably naturally more cautious in their lending after the 2008-2009 credit collapse, and even more concerned about their legal culpability if by chance their auto loans, mortgage loans, consumer loans, or small business loans are deemed by some federal or state regulator to be misleading or unfair. Why bother, the government gives me access to money at 50 basis points and I can make plenty on that just playing it completely safe, the banks must say to themselves.

Cohan in his op-ed piece takes a somewhat different approach to this issue and does it in an excellent way.


Anonymous Anonymous said...

It is amazing that such a massive subsidy to the system that is being funded by the middle class and by retirees is just swept under the rug by the Congress, the Administration, and the regulators. Could one say that this is a bigger rip-off than anything Wall Street has done, and it is taking advantage of retail investors instead of large "sophisticated" institutional investors that should be able to take care of themselves. Why is this such an off-limits issue --- because those suffering from it generally don't understand it, a subprime mortgage analogy if there ever was one.

12:28 PM  
Anonymous Kevin said...

Following your logic, to the extent there is any, it seems that you are implying that raising short term rates would, instead of inhibiting lending by banks, actually encourage it because bankers would again need go work for their money by meeting clients and assessing risk. Interesting thought, counterintuitive, and certainly not something the Fed seems to have remotely considered.

3:39 PM  

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