Friday, September 18, 2009

 

The hypocrisy of the Fed

It's nice to see that someone gets it in regards to risk taking and the Fed's easy money policies.

But riddle me this Bat-readers: Isn't it more than a tad hypocritical for the Fed to be trying to tell banks that too much risk is a bad thing?

After all, the Fed has kept its key overnight bank lending rate near 0% since December and has shown no indication that it will raise this rate anytime soon.

And the Fed has pumped trillions of dollars into the financial system through a variety of programs in order to try and get banks to loan more again. The business of lending is inherently risky. So what kind of message is the Fed trying to send here?

The thing is that encouraging risk taking is necessary know because there is an excess of timidity among almost everyone. Deflation can do that to you. The hard part about being a central banker is to know when to curtail speculation when the bubble is inflating and everyone is enjoying the party. Greenspan failed at that and here we are.

This article is about the disconnect between the need for bankers/investors to take risks and the message coming from the White House that compensation should be structured to discourage risk taking. They are fighting the last war-against excess speculation- and it might cause them to lose the war against deflation. (Of course, I don't believe you can win against deflation but the gov't can make things worse.)

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