Thursday, February 19, 2009

No Cheap Loans Coming From the Federal Reserve

Cheap loans? Not from the Fed

When it comes to financial relief in America, Axel Merk sees no cheap loans on the way from the Federal Reserve.

Merk, the president and CIO of Merk Investments, recently contributed an editorial to the “Investors’ Soapbox AM” segment of Barron’s that criticizes Federal Reserve Chairman Ben Bernanke lack of engagement over some key economic issues. Merk wonders whether Bernanke’s exit strategy from the recession is an exit strategy at all.

As Merk sees it, the following are two major issues he feels that Bernanke and the Fed should address:

  • Mortgage-backed securities (MBS) purchase programs can’t be phased out. The $500 billion the Fed plans to spend on these, according to Merk, can’t be offloaded to the market again. Thus, they’re permanent additions to America’s economic landscape - “almost a doubling from the base before the start of the credit crisis” - and inflationary “unless otherwise sterilized”
  • At some point, Merk feels, President Obama’s stimulus plan will produce the desired effect. However, Merk feels it won’t be loans cheap; it will be “much later, be less efficient and thus more inflationary than many anticipate.” He predicts that in a “best case” scenario, the Fed policy will quickly follow up an initial tightening with dramatic easing. He has not seen indications of this from Bernanke.

Risk: not as small as you imagine

The Fed also claims that the credit risks they have assumed are “rather small” (Bernanke’s words). If this is true, why are they taking on new staff to weed through all of their acquired assets? Merk wonders whether the Fed has bitten off more than it can chew and does not understand the level of risk they have absorbed.  Bernanke, much like President Obama, said that not acting would have been disastrous. Acting is one thing; acting in the most appropriate fashion is another. The mere fact that the government and the Federal Reserve have acted is no assurance that things are going to be fine and the right actions are underway. ... click here to read the rest of the article titled "No Cheap Loans Coming From the Federal Reserve"

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