UNDERNEWS

Undernews is the online report of the Progressive Review, edited by Sam Smith, who covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

May 13, 2009

CRASH TALK

Reuters- A Federal Reserve policy maker called for U.S. government protection of the financial industry to be rolled back because it had encouraged excessive risk taking at the heart of the current crisis.

"The financial safety net, especially those parts that were more implicit and perceived than explicit and written into the laws, played a significant role in the accumulation of risks that ultimately led to the turmoil we are still experiencing," said Richmond Federal Reserve President Jeffrey Lacker.

"While deployment of the financial safety net is often viewed as an essential response to the financial crisis, I believe we need to give serious thought to the extent to which the safety net was actually a significant cause of the crisis," he said in remarks prepared for delivery to a banking conference in Beijing. . .

"The confidence [TARP] has given that institutions will in short order escape the need for government support has done more to facilitate the process of private equity recapitalization than the other programs," Lacker said in response to questions at the forum.

He was referring to TARP, or the Troubled Asset Relief Program, a $700 billion U.S. government fund set up to support banks.

Lacker has been an outspoken critic of the government bailouts to shore up U.S. banks and the implicit backing of firms that are deemed 'too-big-to-fail.'

"The existence of our financial safety net actually can amplify financial instability," he said in his speech.

"A discretionary safety net in particular, creates incentives for "too-big-to-fail" institutions to pay little attention to and underprice some of the biggest risks we face," he said.

Such overt optimism led to massive bets on the U.S. housing market as home prices soared, then to savage losses, including on assets that banks moved off their balance sheets via securitization. . .

The Fed has said on numerous occasions during the crisis that it needs new powers to wind down systemically important financial firms as a remedy for the 'too-big-to-fail" problem.

Lacker said such powers would be welcome, but urged that the use of public money to bail out creditors is closely controlled.

"I would prefer a mechanism that puts credible constraints on discretionary extensions of the safety net," he said.

4 Comments:

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May 13, 2009 4:09 AM  
Anonymous Anonymous said...

Pick one and pass it around:

Option A: The people's government creates its own money, and either spends it into the economy (charging no interest) or lends it into the economy with the people getting the interest on the loans - or some combination of both.

Option B: A few private parties are (for some supposedly good reason that no one can remember) granted free license (by the government and with the people's acquiescence) to a) create all money at interest with but the stroke of a pen, and b) get for themselves all the interest charged.

World's easiest choice?

Don't forget that the few private parties only create/issue the principal and don't create/issue the extra amount automatically necessary to pay the interest due on that principal - which means the overall debt owed will always be getting farther and farther ahead of the ability to pay it. Crash talk? Obviously, it's impossible to sustain this system, and it always was impossible. At some point it must fail: What cannot be paid, will not be paid. The impossible-to-pay debt overhang collapses everything.

We're there.

We gotta overcome our inertia and get jiggy with the fact that there are tremendous fundamental misconceptions our economics is based on. It would help if 99% of economists would please just shut up, since the economics they speak of is *practically* just a list of irrational excuses for overpayunderpay.

Nationalize the Fed, or you've selected the senseless option.

May 13, 2009 12:28 PM  
Anonymous Anonymous said...

Frontline last nite concerned Bernie Madoff and how that fiasco happened. Two things struck me as pivotal and symptomatic. SEC rules say if you have more than fifteen clients and you're giving investment advice you must register as a broker. Madoff had twentysomething hundred clients and didn't register and the SEC knew it. He used other advisors to feed investor money to him. He charged two per cent and gave the feeders one per cent... they got paid to look the other way. The second thing was that had the subprime loan thing not led to a huge downturn forcing clients to withdraw money to cover losses he would not have been caught until his death, because it was a Ponzi scheme where everyone thought they were making money and as long as he had new investment he could keep it afloat. Sound very much like the fed? Check out "Web of Debt": The Inner Workings of the Monetary System" (http://www.globalresearch.ca/index.php?context=va&aid=13510) and "
America's "Money Machine" (http://www.globalresearch.ca/index.php?context=va&aid=13548).

May 13, 2009 2:01 PM  
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