Federal Reserve Branches Out into Retail Lending


I’ve been wondering how long it would be before the Federal Reserve became impatient with banks’ reluctance to return to their irresponsible lending of the pre-housing bubble days.  It seems that day has arrived and, although there’s no details yet, the Federal Reserve has announced plans to make loans directly to consumers – auto loans, student loans, credit cards – whatever. 

U.S. Treasury Secretary Henry Paulson plans to announce on Tuesday the formation of a program to increase the availability of auto loans, student loans and credit cards, the Wall Street Journal reported, citing people familiar with the matter.

The lending facility, which will be operated by the Federal Reserve, is expected to provide loans to investors who want to buy securities backed by credit cards, auto loans and student loans, the people told the paper.

Are you kidding me?  Securities backed by credit cards, auto loans and student loans?  Unless the interest rate on such securities is somewhere around 100%, I think I’d feel much safer buying credit default swaps backed by sub-prime loans!  Who in the world would buy such a risky security?  Oh, wait, I know!  The Federal Reserve will buy them!  They’ll sell them to themselves and then, taking a cue from Wall Street, will slice them and dice them, get some patsy ratings agency to give them a AAA rating, and then sell them China, Japan, Europe and Saudi Arabia.  Brilliant! 

Is it just me, or does anyone else get the feeling when hearing Paulson speak that our Treasury Department isn’t run by the sharpest tool in the shed?  When he and Bush meet to discuss the economy, how much of the conversation is spent exchanging long “uuhhhhh”s?  What does Bernanke bring to the table aside from the keys to the printing press? 

It’s unclear whether there will be restrictions on the types of investors who are able to borrow money, how the Federal Reserve will judge their credit worthiness and how the government will ensure they are using the loans to buy the intended assets, the Journal said.

I think it’s safe to say they’ll give the money to anyone for any purpose.  They don’t give a damn what happens to the money.  It’s just taxpayer money.  It’s not as though it’s something they have to treat responsibly. 

I’m seriously considering moving all my investments to an off-shore account somewhere, safely out of the reach of these idiots.  Hurricane season is over.  Grand Cayman Island would be a nice place to spend the winter.

6 Responses to Federal Reserve Branches Out into Retail Lending

  1. Pete,

    This is nothing more than a futile attempt at Federal money laundering. Our daily bailouts represent a greater amount than our entire National Debt in 1980!

    The growth in GDP necessary to create the additional taxation required to pay back the principal and interest on the combined bailouts and deficit spending is both physically and mathematically impossible. It’s only a matter of time now to the grand crash.

    If in fact my theory that the U.S. has reached mathematical zenith for real GDP growth, taxation levels will fall, not climb.

  2. Pete Murphy says:

    Mike, explain your theory that taxation levels will fall instead of climb. I don’t disagree. I think the government has found it easy and relatively harmless to simply print money (harmless as long as every other economy is doing the same thing). I don’t know why they don’t just skip the “middle man” (the Federal Reserve) and just let everyone run off money on their printers at home. The effect would be the same.

  3. Pete,

    The detailed explanation of falling tax collection is lengthy. But in short, REAL GDP, adjusted for inflation, must continue to rise if greater tax collection is to be realized. Otherwise, tax rates would have to be sharply increased to capture more dollars on the same GDP.

    My theory is that America has reached physical zenith for GDP growth. If I am correct, the number of gross dollars earned will not grow, while the debt will mathematically increase at a hyper rate.

    This is referred to as the point of diminishing returns from which there is no palatable escape.

    Add in the very real fact that 78,000,000 baby boomers are lined up to retire in a continual 17 year procession. These boomers will not only quit contributing to government income, but will withdraw the promised Social Security and Medicare benefits. This event is once more, mathematically a show stopper.

  4. Pete Murphy says:

    I agree that tax rates have to rise, but no one is willing to do it, so it probably will never happen, especially in an environment of falling incomes.

    I’m not sure I agree that we’ve reached our “physical zenith” for GDP growth. Unfortunately, I think that the government will continue to rely on population growth to pump up the macroeconomy. The UN and the US both project that our population will reach something close to 450 million by 2050, tragically. If that happens, per capita GDP would have to fall by at least a third for GDP not to grow. I guess what I’m saying is that I don’t think GDP by itself is a very good yardstick. I think real per capita GDP is a much better one, but even that is only as good as the government’s calcaulation of inflation, which we all know is one of those self-delusional, feel-good calculations. By that measure, we may have reached our “zenith” a year ago, as the 3rd quarter per capita GDP is actually lower than it was at the same time last year, something that rarely happens.

    I think that the government is now hooked as badly as a crack addict on printing money. From this point on, it will be their ultimate solution to everything. Anyone who thinks the U.S. has any intention of ever paying off its debt is delusional. It will be interesting to see what happens when foreign ratings agencies begin to downgrade U.S. debt.

  5. Pete,

    Thanks for the response. I believe that there is a direct correlation between our reaching maximum GDP (adjusted for inflation) and printing money.

    Our monetary system by virtue of compounding interest, is exponential in nature and cannot continue long term. It never could have. The monetary system must balance against the physical system to represent any possibility of sustainability; it does not.

    Some months ago, I argued that the exponential function that is built into our monetary system, may well be reaching the end of its predictable impasse.

  6. Pete Murphy says:

    I agree. Some day we’ll realize that just earning decent pay for a day’s work and saving for retirement isn’t such a bad fate.

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