Date: 2008-03-12 05:46 pm (UTC)
The TSLF does not loan money. It exchanges MBS for Treasuries. This is basically trading out an undesirable financial instrument for a more preferable one.

The TAF swaps MBS for money, and the Fed has to be careful in its use because it affects the target funds rate as a result. The TSLF is a more safe way to move the bad financial instruments off to the side. Also, it's a 28-day trade rather than a permanent transfer.

I'm worried that the goal is to avoid any pain whatsoever.

Supply-side economists believe wealth trickles downhill. I don't know that that's true, but there's something else that's true-- economic pain ALWAYS rolls downhill. Once it rolls downhill, the game is over. The game is absolutely, positively, categorically over. Game over, dude. Game over. It's so Game Over that you can't put in a quarter to continue.

Why? Because you won't have a quarter to put in.

Basically, the problem is about bank solvency. A number of institutions are now insolvent. If they're insolvent, they can't meet their obligations. They start trying to call in debts others owe them in a desperate attempt to meet their own obligations. The result is essentially a new kind of bank run (http://en.wikipedia.org/wiki/Bank_run). This affects you in me profoundly. As I previously mentioned, credit is the fuel of an economy. There are only two ways to grow an economy-- credit or by taking things as "free" when they are not. These days, the latter option is called "empire" and nobody likes it. So, since that's not an option, the only choice is credit.

So, a business sees a chance to expand. It needs capital. It can't get it because banks are insolvent and slitting one another's throats. So, they can't hire more people. More people stay unemployed. Maybe the company had an outstanding bond with a recall option and the bank is desperate and makes a recall on the bond. Well, there's now no capital for that project a bunch of people were working on. They get canned. Consumer confidence falls and a culture of prudence sets in. Prices begin to fall because people refuse to spend. As prices fall harder and harder, people have even less incentive to spend.

That condition will last for a good decade. When it happened here, we called it The Great Depression. Japan just got done with their version of it.

So, unless you like pain for yourself, please hope that two things happen-- that a relatively painless bailout is found and that, afterwards, we nationalize the financial system.

Bubble-jumping is what seems to be happening. The more I look at it, the more I feel sickened by how much our larger scale economies are just shell games played by massive institutions.

You shouldn't confuse bubble-jumping with the natural pumping of an economic engine. You can demonstrate the necessity of credit for expansion using an economy with fewer than ten people in it and it'll contain all the same principles as you'd see on a larger scale, it'd just be "person" instead of "company".

We have been bubble-jumping. That's because Greenspan was blowing a bunch of bubbles and basically left Bernanke to clean up the mess. This is proof positive that you should never let an institution be run by someone who believes that institution is wrong. Greenspan is a strong libertarian who feels the Fed is not a proper institution. He ran it as a bubble blower.
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