This credit crisis is a big deal and we will ultimately get it right. Let’s take a look at some necessary requirements to get past the credit crisis and start dealing simply with a severe recession.
- Lowering the Fed Funds and Penalty Rate. The Fed began this process in the fall of 2007 when many of us (me included) were unaware how big this would get. Beyond just lowering rates, the Fed had to commit to keeping them low for an extended period of time. I’d say this is done.
- Normalize the Yield Curve. In the second half of 2007 before the Fed began easing many of us ignored the inverted yield curve, a near perfect predictor of recession. The 2-10 spread has remained steep and normal near 190 bps for an extended period of time. One more task accomplished.
- Creative Monetary Policy. Opening the discount window to broker dealers, relaxing credit requirements, Asset Backed Commercial Paper Program, AIG (AIG) Credit Facility, Commercial Paper Funding, Bear Stearns Financing, Term Securities Lending Facility, Term Auction Facility, B of A (BAC) Bailout, Term Auction Loan Facility, Currency Swaps, Money Market Investor Funding Facility, Citigroup (C) Bailout, GSE Debt Purchases, and finally purchases of longer maturity Treasury debt. Good job Federal Reserve.
- Creative FDIC Policy. Liquidity Guarantees, GE (GE) Debt Insurance, Citigroup Bailout, Bank of America Bailout. The FDIC is soon to handle the auction of assets to PPIF participants. So far so good.
- Fiscal Stimulus. Controversial for sure but massive no doubt. $138 billion in 2008, $780 Billion in the next few years. A $300 Billion HUD program. I would argue this is the least effective and possibly counter productive.
- Globally coordinated monetary easing and fiscal stimulus. Done.
- Recapitalization of major financial institutions. $750 Billion in TARP plus similar programs worldwide. It’s being done but is it enough, I simply don’t know. Maybe the stress tests will shed some light.
- Re-start the shadow banking system. TALF kicked off last week. It’s too soon to declare victory until ABS lending resumes without TALF life support. A move in the right direction for sure.
- Reform Mark to Market. Bob Herz, Chairman of the FASB finally realized he wasn’t working for the post office on March 12th, when members of the US House took him to the woodshed. What took them so long?
- Reverse or at least moderate asset write downs in the financial sector. It is way too soon to declare victory here. Q1 write downs will depend heavily on what happens with mark to market. Hopefully Q2 will provide visibility on the back of some PPIF auction volume.
- Move bad assets off bank balance sheets. PPIF is designed to do this. The plan appears well thought out and of sufficient scope to get the job done. Too soon to say we are out of the woods.
- Stabilization of housing prices. Progress has been made, too soon to declare victory.
- Comprehensive regulatory reform. There is growing consensus this is needed. I’d guess we have time on this one.
In short, we have made tremendous progress dealing with the worst financial situation in two generations.