Tony Soprano

A Sensible and Refreshing Move from the Fed

for Mr NoFate

"Here is an analogy ...your teenager has maxed out their credit cards and is to a point they can no longer make payments. You step in as a co-signer and get the limits on the cards doubled.

Is this the right decision? This is what the Fed did for the banks yesterday."

It’s a good simple story and to a large degree I agree with your story. Here is my view of the story.

The son does use a credit card but instead of spending it on himself he wants to lend out the money and become loan shark. His idea is to lend out as much money that he can. In the mean time people that he is lending out to all live on an island. The island depends on a dike system to keep the island from going underwater. The dikes take an enormous amount of power to run. The islanders are taxed a lot to keep the power going..

The loan business is slow starting and the son wants it to grow much faster. His rich daddy is still backing him up and thinks his son is remarkable. The son's new business plan offers loan owners interest in a new waterfront country club if they barrow more. They see it as a steal and it makes them feel rich so they barrow more. His new business plan is a success for many years. The new country club is well under construction. Most of the people on the island are happy and think they have it made. The son pockets a good deal of wealth but he always wants more and more.

As more time passes, the cost of the power to run the dikes starts to increase rapidly. Sadly some of the islanders become sick. The doctors on the island suspect the Avian virus. Some even die and others cannot work. Unemployment starts to rise dramatically and the power for the dikes continues to rise.

Not all of the islanders owe money to the son. Many are still wealthy and never liked what the son has done and they are very much concerned about the rising cost to power for the dikes. More time passes and construction cost for the country club increases as well. Construction on the project starts to slow down. Many on the island start to become angry.

Taxes receipts to pay for the power for the dikes starts to diminish. Some of the islanders want to raise taxes to pay for the power. The islanders that are sick are not paying taxes. A meeting is called. The meeting is a failure and the son goes into hiding. However, the islanders come up with another plan but still many on the island do not like the newer plan as well

The newer plan requires the islanders to barrow more money but from the mainland. The wealthy on the island do not like this plan because it will require them to pay more taxes in the future. However, some of the middle class people on the island become restless and crime increases.

The islanders are at a serious crossroad. Damned if they do and damned if they don’t. Many on the island say the island will sink completely underwater if new monies are not borrowed. Others do not agree and feel the island will be on okay without the additional debt.

I’m not going to finish this story. I will let your imagination do the rest.

My point is we can let GM or Ford go under and we will still have cars. However, we cannot take this chance with the banks. Banks are the corner stone, hence the island metaphor, of our capitalism. If the banks sink we all sink. We cannot afford to take the slightest chance that this will spread further and sink us all. At the same time its a shame that a lot of our mortgage companies, brokerages firms and money center banks let this happen.

A Sensible and Refreshing Move from the Fed

Excellent!!!

Thanks for taking the time to blog and point out some very good facts that need to be stated. Your blog is non-emotional and unlike most blogs sticks to the facts.

Please come by the Bada Bing for a drink. I would love to have you.

Short Covering Helps Boost Stocks

Never ever under estimate America, its people, its government, its ideas and its place in the world.

Short Covering Helps Boost Stocks

Mr Whidbey

You don't understand. What the Fed did today its NOT inflationary. That was the beauty of it. In this action or swap what they are offering is not the printing of more money. They are using Treasuries (securities already in the market and owned by the gov.) to swap the bad debt. In addition, this was a world coordinated effort and you will see more of these type of tools being used. The Fed did not cut rates today and the Dow was up 416 points. Finally, what will happen when the ECB cuts and it will look differently at the dollar now that we have the swap auction by the Fed?

Short Covering Helps Boost Stocks

We're having Carmela's lasagne with basil leaves and peaches in red wine for dessert tonight. I told her we got some good news today and we need to celebrate a little.

All kidding aside, I like what Rich Santelli said this early morining: "This is huge."

This is not the absolute end to this crisis but its a big step in the right direction.

What fantastic timing by the Fed. Just when, from a technical point, the Fed unleashed their time bomb. What happened to the crasendo to the down side? Will it still happen?