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Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen
Please don't put me in that camp.
The CBs can't solve this kind of deflationary problem with the kind of inflation they can create.
The way the Fed normally injects money into the economy is through the FOMC, by buying Treasuries. But that's a broad, economy-wide approach. The problem today is that specific banks are running massively short of reserves (due to losses, as per my previous posts...). So the Fed had to come up with programs like TAF that allowed them to help specific banks avoid the destruction of their reserves by temporarily taking loss-inducing loans off their books.
But TAF and programs like it aren't a solution; they are a short-term band-aid. Loans will continue to default, and losses will continue to mount. Since TAF is all borrowed from the Fed; in theory it has to be repaid at some point. But the banks have lost so much through defaults that it probably can't ever be repaid. Inflation in the form of more money in the general economy doesn't come close to solving that problem.
No, there are only two solutions. One is to let the banks go bust. But in that scenario, money in their depositor's accounts would be destroyed, and in their already-impaired state, the ripple effect would take out most of the US banking system. The FDIC could, with the Fed's backing, theoretically replace people's savings, but it would be a giant scare and a nightmare that isn't close to being politically acceptable.
The only other option is for the bad debt to be permanently purchased by the government in some way -- whether that will be through bank nationalization or something else isn't yet clear of course. Although it involves the creation of lots of new money, it's actually not inflationary in the usual sense, because the new money would offset existing losses and therefore wouldn't increase the money supply.
Originally posted by grapejelly
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The CBs can't solve this kind of deflationary problem with the kind of inflation they can create.
The way the Fed normally injects money into the economy is through the FOMC, by buying Treasuries. But that's a broad, economy-wide approach. The problem today is that specific banks are running massively short of reserves (due to losses, as per my previous posts...). So the Fed had to come up with programs like TAF that allowed them to help specific banks avoid the destruction of their reserves by temporarily taking loss-inducing loans off their books.
But TAF and programs like it aren't a solution; they are a short-term band-aid. Loans will continue to default, and losses will continue to mount. Since TAF is all borrowed from the Fed; in theory it has to be repaid at some point. But the banks have lost so much through defaults that it probably can't ever be repaid. Inflation in the form of more money in the general economy doesn't come close to solving that problem.
No, there are only two solutions. One is to let the banks go bust. But in that scenario, money in their depositor's accounts would be destroyed, and in their already-impaired state, the ripple effect would take out most of the US banking system. The FDIC could, with the Fed's backing, theoretically replace people's savings, but it would be a giant scare and a nightmare that isn't close to being politically acceptable.
The only other option is for the bad debt to be permanently purchased by the government in some way -- whether that will be through bank nationalization or something else isn't yet clear of course. Although it involves the creation of lots of new money, it's actually not inflationary in the usual sense, because the new money would offset existing losses and therefore wouldn't increase the money supply.
there are plenty of people offering plenty of solutions and each one of them thinks they're right. And the people making the decisions only hear solutions from contributors and lobbyists.
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