Cheap loans? Not from the Fed
When it comes to financial relief in America, Axel Merk sees no cheap loans on the way from the Federal Reserve.
Merk, the president and CIO of Merk Investments, recently contributed an editorial to the “Investors’ Soapbox AM” segment of Barron’s that criticizes Federal Reserve Chairman Ben Bernanke lack of engagement over some key economic issues. Merk wonders whether Bernanke’s exit strategy from the recession is an exit strategy at all.
As Merk sees it, the following are two major issues he feels that Bernanke and the Fed should address:
- Mortgage-backed securities (MBS) purchase programs can’t be phased out. The $500 billion the Fed plans to spend on these, according to Merk, can’t be offloaded to the market again. Thus, they’re permanent additions to America’s economic landscape – “almost a doubling from the base before the start of the credit crisis” – and inflationary “unless otherwise sterilized”
- At some point, Merk feels, President Obama’s stimulus plan will produce the desired effect. However, Merk feels it won’t be loans cheap; it will be “much later, be less efficient and thus more inflationary than many anticipate.” He predicts that in a “best case” scenario, the Fed policy will quickly follow up an initial tightening with dramatic easing. He has not seen indications of this from Bernanke.
Risk: not as small as you imagine
The Fed also claims that the credit risks they have assumed are “rather small” (Bernanke’s words). If this is true, why are they taking on new staff to weed through all of their acquired assets? Merk wonders whether the Fed has bitten off more than it can chew and does not understand the level of risk they have absorbed. Bernanke, much like President Obama, said that not acting would have been disastrous. Acting is one thing; acting in the most appropriate fashion is another. The mere fact that the government and the Federal Reserve have acted is no assurance that things are going to be fine and the right actions are underway.
Traditionally, the Fed’s activities are “off-balance sheet” from Congress. Now they’re beginning to change tactics and take it upon themselves to allocate credit to industries and sectors. Merk fears that the transition from monetary to fiscal policy will expose the Fed to Congressional and public criticism that can damage the Fed’s credibility and effectiveness in ways it has never faced before. That would hurt the Fed’s ability to float ideas on monetary policy.
Ride this out
Cheap loans will remain in circulation for consumers who need emergency cash, but the Federal Reserve may have no such quick fix for what ails the nation. Time will tell. Strap yourself down and hold on.
Related articles
- Lands of the lost (economist.com)
- Read the Fed’s statement (money.cnn.com)
- Fed Slashes Rates! (usnews.com)
There doesn’t seem to be a quick fix for this situation – there couldn’t be with the staggering amount of money that’s been sent down the tubes. I think it’s obvious that a good deal of what happened was more due to problems that were systemic. Granted, there were foreclosures, but still – the amount of foreclosures were less than 10% of homeowners with a mortgage. You can’t tell me that a system that is functioning at 90% capacity is that susceptible to collapse.