Fed's Unsecured Lending Plan Won't Work

Now that they have comprehensively destroyed unsecured lending, the Fed is said to be scheming to revive it. Sorry, won’t work, banks need to raise capital and they have no incentive to raise it as long as they can feast on subsidized lunches, courtesy of the Fed.
From the FT:

The Federal Reserve is working with the US Treasury on plans for a dramatic move into unsecured lending in the hope that this extreme step could help bring credit markets back to life.

As well as unsecured lending to banks, this could lead to the Fed directly purchasing commercial paper or funding a special purpose vehicle set up to do this.

Any unsecured lending would be a radical departure for the Fed. Central banks the world over almost never make unsecured loans, and the Fed has never done so in its history.

Fed’s first foray into unsecured loans

Comments

[helplessobs...:]

You are almost right. It will work for awhile. Nothing like free money to bolster bank earnings.

2008 Oct 07 11:27 AM