The Federal Reserve, the US Treasury, and the FDIC Appear Scared To Death

In his speech last Thursday, Fed Chief Ben Bernanke essentially downgraded the US economy. His script was from the Beige Book prepared for the December 11 FOMC meeting. His theme is that the ongoing credit crunch, a weakening housing market and rising energy prices creates economic headwinds for consumers, and could cause slower than desired economic growth.

While not forecasting recession the Fed Chief indicated that consumers could become more cautious as they try to cope with all the stresses. Bernanke warned that a sharp cutback in consumer spending could send the economy into a tailspin. Because of this risk the Federal Reserve needs to be alert and flexible. This signals that Bernanke leans to cutting the federal finds rate to 4.25% on December 11.

Meanwhile, the US Treasury wants to work with the major regional banks offer qualified homeowners the opportunity to freeze interest rates on certain subprime mortgages. As a capitalist nation, we de-regulated the banking industry allowing Citi to build its financial supermarket. That’s worked really well!

Then we watched former Fed Chief Alan Greenspan cut the federal funds rate to 1%, which was the financial license to speculate, and for homebuilders and developers to overbuild. Greenspan encouraged subprime mortgages, and the use of derivatives to spread the risk.

Expectations for further rate cuts helped the Dow, S&P 500 and NASDAQ to rally to new highs for the year in October. Then it was “Beware of the Ides of October” as community and regional banks reported dismal third quarter earnings. The next round of earnings problems won’t be known until mid-January. Stress in the banking system was confirmed in the FDIC Quarterly Banking Profile for the third quarter, released on Wednesday.

The FOMC is well aware of the increasing problem loans on the balance sheets of our nations FDIC-insured financial institutions. Loans past due and noncurrent ended the third quarter at $175 billion, up 24% from the second quarter. This reduced net operating income by 22% sequentially.

Would you believe that while problems relative to credit derivatives came to light in the third quarter that the major banks added another $20 trillion of these risk transfers pushing the today of notional derivatives to $173 trillion!

Live Update from my reliable sources - Richard Suttmeier

Interesting concept, de-regulation. How's that workin' out folks?

"socialize the risk, privatize the profits"