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The Fed and Treasury decided ‘the problem’ was the LIBOR/Fed funds spread and threw everything they had at it.

What finally did the trick was the Fed’s unlimited swap lines with the MOF, BOJ, ECB, and SNB.

Unfortunately that turned a technical problem into a fundamental problem, as I’ve previously described.

Back tracking to why they wanted LIBOR rates lower- they wanted to assist the mortgage market and consumer debt in general.

There were other ways to do this, such as my plan for uncollateralized lending to their own member banks where government already regulates and supervises all bank assets and insures bank deposits.

That would have eliminated the interbank market for Fed member banks.

Euro banks would have still been paying up for USD borrowings and been distorting LIBOR.

The next step would be to get the BBA to adjust the USD LIBOR basket to not include banks who had to pay substantially higher for funds than the US member banks.

(This is supposed to happen automatically but the BBA is dragging its feet as it did with Japan years ago.)

And this would have immediately gotten LIBOR and Fed funds back in sync.

Also, they could have expanded treasury funding for the agencies to make mortgages to member banks in general for the same purpose and lowered mortgage rates that way.

Point- lots of other/better/more sensible ways that don’t increase systemic risk than the policy of unlimited (and functionally unsecured) USD lending lines for foreign commercial banks.

The ‘cure’ seems a lot worse than the new problems it creates.

Note the euro falling fast…


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6 Responses

  1. Why did lending dollars to the other CB’s bring down libor?


    The next step would be to get the BBA to adjust the USD LIBOR basket to not include banks who had to pay substantially higher for funds than the US member banks.

    Don’t understand this proposal? USD LIBOR basket? How would it bring LIBOR down?

  2. the funds were offered at a lower rate

    libor is computed by averaging a basket of banks. if the ‘weaker’ banks (that pay higher interest rates) are thrown out of the basket the average rate goes down

  3. “where government already regulates and supervises all bank assets and insures bank deposits.”

    That is simply a baseless assumption I think Warren. What regulation? Barney Frank clearly stated today in his hearings that legislation introduced as far back as 1994, gave Greenspan many legal authorities that he said he would not use because he trusted the “market” over the government. Only now is Bernanke talking about invoking powers that have been available for almost 15 years. It was the wild west, there was little regulation and supervision – why do you believe this falsehood?

    “That would have eliminated the interbank market for Fed member banks.”

    Again this gets back to what Orszag said, and what barney frank was mentioning in his house financial services hearing today – Greenspan and others wanted market solutions – they didn’t want the government in the middle of all this. Who do you want sailing on your titanic Warren? A bunch of smart do it yourselfer libertarians who get things done or a bunch of government tit sucking leeches who wait til the boat sinks before they get through round 1 of their house hearings? Isn’t the royal bank of scotland running commercials about silly beauracrat types talking themselves to death but they don’t “make it happen” – now those fools had to be bailed out – LOL!

    Here it is:

    I would rather have the guy “making it happen” that some silly gubbmint types talking about my problems.

  4. Warren you talk about gubbment regulation – how can you believe this – it makes you look so silly!! We still have foxes in henhouses – until these crony crooks are all booted to the curb – their wealth stripped from them and put on chain gangs that do infrastructure fixes – trust and confidence will never return.

    In 2000 SEC Testimony, Paulson Recommended “Self-Regulation” For Wall Street, Plus A Rule Change Now Blamed For Collapse

    Back in 2000, when Hank Paulson was CEO of Goldman Sachs, he testified in front of the Security and Exchange Commission. Among other things, he lobbied the SEC to enact a “change to self-regulation” for Wall Street. He also urged them to change the “net capital rule” which governed the amount of leverage investment banks could use. The net capital rule was indeed changed in 2004, and is now blamed for the investment banks’ collapse.

  5. one more time:

    if we want a banking system, insured deposits and regulated assets has proven the only way to go.

    yes, it’s not perfect, it’s a work in progress, and it can and does get very ugly.

    But it’s far better than using liabilities for market discipline, as history has repeatedly shown.

  6. “if we want a banking system” I don’t know Warren, adam and eve lived in the garden of eden, my preacher tells me that was the paradise we should all strive for, how many banks were there? I read this book once where the bankers had all these nice yachts in the marina and this guys asked where are all the customer’s yachts. Do you have a boat Warren?

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