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Pastimes : The Philosophical Porch
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From: Rarebird1/31/2008 9:12:34 AM
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Transcendental Market Fragments:

The Fed:

The objective of the Fed seems to be to steepen the yield curve by driving short term rates down faster than long term rates. In normal times, this has the effect of pumping up bank profits. Banks borrow short term and lend longer term, making their profits on the difference in interest rates — a positive yield curve tends to boost bank profits.

The Fed is in such an incredible panic state right now. This is why Bernanke has quickly slashed rates 125 basis points in recent days. I suspect that the banks have gotten very tight with normal business lending and not just with real estate lending. The Fed is desperately trying to set up a situation where banks can generate more profits by lending to business than lending to each other. With a steeper yield curve, it becomes advantageous for banks to make real loans to real business, rather than hoarding cash in their accounts. The fact that the Fed has acted so swiftly in recent days means there is a real problem in the real economy. I would not be surprised to see a US Bank crash into bankruptcy at any moment.

Most US Financial Institutions show neither fiscal prudence nor moral responsibility basically because they know that Big Daddy, the Federal Reserve will bail them out (with their printing presses running inside their basements), making sure they can meet all calls for payment.
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