Fed keeps pumping money into banks
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KAI RYSSDAL: We’re going to spare you the text of the Fed’s whole announcement this morning and just paraphrase the relevant line. It goes something like this:
That the Fed is going to “extend its liquidity programs in light of continuing substantial strain in financial markets.” (That last part there, by the way, is a direct quote.) In English it means that Chairman Ben Bernanke is going to keep the lifeline of cash to the banking system that it’s had in place for more than a year now.
And our Senior Business Correspondent Bob Moon points out that today’s action is a pretty good sign the Fed is nowhere near weaning the banks off his emergency treatment.
BOB MOON: After all this time, the patient remains under intensive care . . . with a steady flow of medication, some of which the Fed has been providing for more than a year, its initial treatments extended two, three and even four times now.
Peter Morici is an economist at the University of Maryland. He says Chairman Bernanke and company essentially decided again today the patient remains unstable:
PETER MORICI: What the Federal Reserve right now is doing is providing life support, or emergency room services, to the banks. And we need some sort of clinical program to rehabilitate them and get them healthy again.
If you sense frustration, Morici points out the diagnosis has been the same for a long time: The patient’s being poisoned by toxic loans that need to be cut out.
MORICI: Quite simply, the Treasury and the Fed will be perpetually underwriting the banks and securities companies until they come up with a program to remove from the books of these institutions all of this questionable paper and to work them out. That is, to do triage on the loans — reworking some, letting others foreclose and leaving still others that will be repaid alone.
The banks aren’t making those kinds of tough but necessary triage decisions, so Stanford University economist Michael Boskin says it’s long past time for the Fed to start wielding the knife:
MICHAEL BOSKIN: That’s the single-best thing we can do to get the financial system back to health again. I think that we’re going through that process way too slowly, and the longer we wait, the longer this will be drawn out.
And perhaps the more likely the banks could develop an unhealthy dependency on the Fed’s medication. But at Duke University, business law professor Bill Brown says the banks don’t seem to be hooked so far.
BILL BROWN: If they ever really started lending this extra $800 billion on out into the economy, they might get addicted to these programs, but it’s very clear they’re not addicted yet.
Brown says until lending levels return to normal, the treatment is likely to continue.
I’m Bob Moon for Marketplace.
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