Tuesday, April 21, 2009

WSJ Article About Why the "Panacea" Will Not Work

Three reasons why Fed lending is not the panacea:

  • (1) Fed lending can’t solve “the fundamental problem — the shortage of capital in the banking system.” He added that “until the banking system is viewed as being sufficiently well-capitalized and is able to expand its lending activity significantly” the economy will suffer.
  • (2) Legal limits require the Fed to lend only when the would-be borrower offers sufficient collateral; it can’t lend unsecured or provide guarantees. (The Treasury can, however.)
  • (3) Initiatives such as TALF (Term Asset-Backed Securities Loan Facility) are off to a slow start because of “the reluctance of investors to participate” in part because of “worries about what participation might lead to” given the political environment. Dudley pronounced these worries “misplaced.”

In response to the first reason, “capitalized” banks require that workers receive more than 1975 wages.

Either increase wages or endure deflation until prices are more in line with wages. And forget about inflation. It’s only inflation if the banks actually LEND that money that has been lended to them by the Federal Reserve. Until then, it’s called “hoarding” and weak wages will eventually pull prices down. Ever since Reagan we’ve tried to come up with temporary fixes for each recession or economic challenge that came about due to that imbalance between wages and prices, with the last one being Greenspan’s housing bubble. We simply MUST get wages in line with prices.

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