financial system bailout

Fed Chairman Uses Incompetent Ratings Firms for Bailout

by Hans Bader on December 18, 2008 · 1 comment

in Bailout Watch, Economy, Legal, Precaution & Risk

“Federal Reserve Chairman Ben S. Bernanke is basing hundreds of billions in emergency lending on credit ratings from companies that gave AAA grades to toxic securities. The Fed has purchased $308.5 billion in commercial paper and lent $631.8 billion” based on appraisals by the bond rating agencies Moody’s, Standard & Poor’s, and Fitch.  So reports Bloomberg News.

Before the financial crisis, we repeatedly warned in vain that these ratings agencies were failing in their job, and that regulations that prevented independent companies from competing with them should be eliminated.  But the Fed continues to rely only on these firms, and shield them from competition, bowing to their special status as the  “major nationally recognized statistical ratings organizations,” rather than relying on independent ratings firms, such as those accountable to investors.

“Policy makers should take the opportunity to spearhead a change in the system by elevating the independents, said Alex Pollock, a resident fellow at the American Enterprise Institute in Washington.  Unlike the top three, they are paid by investors who subscribe to their services, rather than by businesses whose products they rate. That makes them less likely to grade securities favorably, Pollock said.  ‘Why would you limit this to the dominant ratings agencies that helped get us into this situation?‘ he said.”

“It is foolhardy” to rely on the major rating agencies, said Keith Allman, chief executive officer of Enstruct Corp., which trains investors. The major raters issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis.  “They’re outsourcing the credit assessment to a group of people whose recent performance has been unbelievably bad,” said Allman. “If their goal is to not take a loss on these assets, they should be hiring independent analysts.”

Fed Chairman Ben Bernanke should be removed from office.  He is destroying the value of the dollar and discouraging investment in the U.S. through his reckless printing of money and buying up of risky and worthless securities at taxpayer expense.  He has impoverished savers and punished thrift through his irresponsible interest rate-cuts and giveaways to banks.  He has promoted irresponsible bailouts for deadbeat mortgage borrowers.  And he has ignored statutory limits on Federal Reserve authority through a succession of failed bailouts that are both radical and unauthorized, legally justifying his removal from office.

The Value of a Dollar

by Hans Bader on December 18, 2008 · 3 comments

in Bailout Watch, Economy, Legal, Precaution & Risk

“The dollar yesterday staged one of its biggest one-day drops against the euro and fell to a 13-year low against the Japanese yen as near-zero interest rates and the Federal Reserve’s plan to print vast sums of cash dilute the value of the greenback,” reports the Washington Post today.

“On Monday, the Fed cut . . . the federal funds rate, at which banks lend to each other, from 1 percent to a target range of 0 percent to 0.25 percent, and effectively vowed to print as much money as it needs to try and pull the United States from a worsening recession.”

“In response, investors are dumping the dollar and buying up other currencies.  If the dollar’s fall is unchecked, it could jeopardize the long-term faith of foreign investors in the value of American currency and could cause foreign investors to dump U.S. stocks and other assets,” and cut investment in the U.S.

Foreign investors in the U.S., like Switzerland’s Julius Baer family of mutual funds, have long criticized the Fed’s easy-money policies, which helped spawn the mortgage bubble and financial crisis, and now are destroying the value of the dollar in a vain effort to push back the day of reckoning for years of excessive borrowing that occurred in what Julius Baer calls “The Age of Decadence.”  The Fed’s absurdly low interest rates are impoverishing savers and punishing thrift and responsibility.

The Fed’s frantic efforts to bail out the economy by printing money and attempting to inflate the money supply have been colossal failures to date, and some of its bailout measures have exceeded its legal authority.  Undaunted, the Bush Administration is now pushing a unilateral automaker bailout that lacks Congressional authorization and construes the financial bailout statute in an unconstitutional manner.

Thanks to his reckless bailout policies, which have exposed taxpayers to hundreds of billions of dollars in losses, and exploded the national debt, Fed Chairman Ben Bernanke will go down in history as the worst Fed Chairman in generations.  His record is far worse than even infamous predecessors like Arthur Burns, the spineless Fed Chairman who gave in to Richard Nixon’s pressure to run the printing presses to temporarily prop up the economy to get Nixon re-elected in 1972, resulting in the severe recession of 1973-75 and the “stagflation” of the 1970s.

Feds to Flush Billions More Down the Toilet, Destroying Jobs

by Hans Bader on December 4, 2008 · 12 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk

The Treasury Department wants the federal government to effectively buy up all mortgage loans in America, by selling treasury bonds to buy up mortgage-backed securities. In exchange, lenders would have to charge a ridiculously low interest rate of 4.5% for a 30-year mortgage, which is lower than inflation in many years, and way lower than people with even perfect credit receive now.

The Treasury proposal will put taxpayers on the hook for tremendous potential losses if borrowers default, with little upside, thanks to the low interest rate. It’s the same kind of stupidity that led to the collapse of government-backed mortgage lenders Fannie Mae and Freddie Mac, which followed federal mandates to encourage “affordable housing” and “diversity” by buying up risky subprime mortgages that defaulted, and then had to be bailed out by taxpayers, even though they were already receiving billions of dollars in taxpayer subsidies.

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