The always-astute Yves Smith notes that it will be difficult to wean the financial sector off the Fed's emergency life-support, but then fails to mention Tim Geithner's ominous suggestion in his recent op-ed that the Fed is actually considering making some of the emergency measures permanent. First, here's Smith:
We wondered ever since the Fed established and then repeatedly increased the size of its Term Auction Facility, which now provides $150 billion of support to the US banking system, how the central bank would ever be able to wind down this program. It certainly can't do it when the financial system is fragile, and banks will argue that the withdrawal will hurt their operations even when the economy is in better shape.Smith then links to an article in the FT by Gillian Tett that makes essentially the same point, but wildly misinterprets Geithner:
[A]s any addict knows, addiction rarely disappears by itself. On the contrary, procrastination tends to make the problem worse, as habits become deeply ingrained—be that in Japan, or anywhere else. The US Federal Reserve, for its part, appears to be keenly aware of this problem. And Timothy Geithner, New York Fed president (and himself an expert on Japan), has signalled his desire to avoid any Tokyo-style policy fudge by calling for a broader rethink of the regulatory structure.Really? Here's what Geither wrote in the FT just 5 days ago:
The Fed has put in place a number of innovative new facilities that have helped ease liquidity strains. We plan to leave these in place until conditions in money and credit markets have improved substantially. We are examining what framework of facilities will be appropriate in the future, with what conditions for access and what oversight requirements to mitigate moral hazard risk. Some of these could become a permanent part of our instruments. Some might be best reserved for the type of acute market illiquidity experienced in this crisis.Explicitly stating that the Fed is considering making some of the emergency facilities permanent is an awfully strange way of signalling a "desire to avoid any Tokyo-style policy fudge."