Friday, February 19, 2010

If Fraud Is Something That Everyone But Bankers Can Commit Than We Are All In For More Rough Times

The Federal Reserve Bank raised the discount rate a quarter of one percent. This is what is referred to as 25 basis points. 100 basis points equal one whole percent. The Fed wants to signal to the banks and more importantly the economy that, in their opinion, it is no longer necessary to keep this one interest rate so low. In other words, the banks are in much better shape than they were 18 months ago, and this is a good thing. This is more for show, in my opinion, because the really big levers that the Fed has are still available should credit get tight.

Let us just review a little. The Fed can put reserves into the banking system through its Open Market Operations. That simply means that the Fed can buy US Treasuries from primary dealers and in that way put reserves back into the system. If they want to slow the growth of the money supply and in turn the economy, they can then sell US Treasuries back to the primary dealers and take reserves out of the system. The big tool is the reserve requirement, and that they will use if they believe the economy is getting too hot. This I don't think we will have to worry about for a while as our domestic economy isn't going anywhere too fast.

We all are still waiting to see what kind of new regulations are going to come out of Congress. I am expecting I think like most, to be disappointed. The bank lobbyists have first, second, third and last shot at our Congressional representatives, so, I don't expect that we will see the kind of regulations we really need. If fraud is still something that everyone but bankers can commit than we are all in for more rough times.

Stay tuned.