Mr. Paulson only has roughly 30 days left in office and somehow he is convinced that he needs to take down the second tranche of TARP funds…

From the WSJ (emphasis mine):
In the very short-term, the allocated but not yet disbursed TARP balances, in conjunction with the powers of the Federal Reserve and the FDIC, give me confidence that we have the necessary resources to address a significant financial market event. It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability. I will discuss that process with the congressional leadership and the President-elect’s transition team in the near future.

How exactly is this clear?  What have the funds done to really help anything?  The banks have been recapitalized on the liability side (deposits); however they are just dropping that back into the fed and earning interest on it.  Credit is still jacked, consumers are still underwater, mortgages are a mess, home values are continuing to decline, we’ve entered the land of ZIRP and the fed is printing money.  For Pete’s sake, why does the Treasury need more capital?

Greg Mankiw points out a really fun fact…

The AP reports:

President-elect Barack Obama says the government has been “asleep at the switch” when it comes to overseeing the nation’s financial system.

He says Americans are “feeling frustrated that there’s not a lot of adult supervision.”

A smart but snarky friend points out:

You might appreciate the irony that Citigroup’s primary federal regulator is Timothy Geithner.

Too Funny! Tim Geithner is a great guy, and will likely be a fantastic Secretary of the Treasury. This sort of quote makes me laugh at the headline culture we have become. A guy I work with talks about this all the time, this one just puts the icing on the cake. If you happen to know who is responsible for what, the quote from Obama is just silly, if you take it at just the headline, then you’ll believe we are in for change!

Yes we can!

It will be dropping money, lots of money.  How much money?  Well that all depends on how much it costs to force down interest rates.  There have been a lot of articles over the past couple of days regarding this, personally I think this paragraph from the economist sums it up nicely:

In theory, purchases of longer-term securities could have more impact by pulling down longer-term interest rates. The 10-year Treasury yield, for example, is 2.3%, and the 30-year conventional mortgage-rate is around 5.5%. But whereas the Fed knows more or less just what it has to do to move short-term interest rates up or down, it is in uncharted territory on longer-term interest rates. Indeed, theory suggests that the purchases would have to be spectacularly large to affect such large, globally integrated markets.

In theory… right.  In theory we are screwed.  Even if this whole plan works, and it probably will, how the heck are we supposed to unwind this disaster? This about this for a moment, GDP is a factor of Money Supply and Velocity.  Since velocity has dropped, we are pumping money supply and trying to force credit down peoples throats.  Once this mess actually gets cleaned up, how on earth are we going to pull this back?  When velocity beings to pick up, well hello inflation, lots of it.

Okay, getting side tracked here.  The fed is trying to push down rates, and they will likely be successful.  My question is to what end?  Lets pretend for just a few moments that mortgage rates do fall to 4.5%.  What will happen at that point?  Well, qualified, capitalized, worthy credit risk, non-defaulting consumers will refinance and save more money every month.  All of those people who are defaulting will not be able to refinance.  Why you ask?  Well that’s a great question.  Basically they won’t refinance because they can’t and shouldn’t be able to.  In most cases these folks shouldn’t have received a loan to start with, they are not credit worthy.

I get why the fed is doing what it is doing, the cost of actually fixing the virus is politically unpopular and very high.  The problem is we can only steal from our children’s, children’s, children for so long.

On a similar note, I read recently that there is talk of legislating a no appraisal refinance. This may help a bit as it will allow those folks who have ticking time-bomb loans, but are still good credit risks to refinance an upside down property and ride it out.  However, this concept seems to be littered with second and third order problems…

Lets just say I’m a little more than worried about the future of our economic system and our country as it stands today.  We may come out of this stronger, however the path to that exit is going to hurt – a lot.

Well, the fed is meeting again shortly, and it appears that they are going to hold the fed funds rate at its current levels.  While I’m personally happy they are doing this (I have a floating rate HELOC), I’m not sure  this is the best policy given our current ecnomic difficulties.

I am not a fan of lower interest rates, given our current situation.  It is my opinion, that the fed should take back the last .25% cut, and raise the rate at its next meeting.  After making one adjustment to the rate, they can hold tight for six to nine months to allow economic activity to stablize before moving into a longer tightening cycle.

By raising the fed funds rate by .25% at the next meeting, the federal reserve provides a very, very clear signal that they are serious about inflation and the dollar.  A stronger dollar means lower relative oil prices and that is good for our economy.  It isn’t the end of the oil issues, but it will help to stem the inflationary pressures of rising oil prices and the ecnomoic stress of gas prices on the consumer.

What are your thoughts?