FOMC Chairman Bernanke gave a speech this morning <st1:city w:st="on"><st1>in London</st1></st1:city> to outline the policy response to the current credit crisis. It seems obvious t the cause of the turn in the housing cycle was the extension of credit to unworthy borrowers under a system designed to reward short term commissions instead of a long-term focus on underwriting loans. This process was encouraged by the institution Chairman Bernanke currently heads.
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The rest of the speech is a documentation of current policies of the Federal Reserve and is also outlines a “toolkit” of ideas for the Federal Reserve to potentially use in the future. But generally, these ideas are only to backstop credit agreements in order to perpetuate further credit expansion. According to Chairman Bernanke, the unwinding of these facilities, or the exit strategy, should occur as normalized credit conditions return.
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But this makes me wonder at what point does demand that securitized credit assets without a federal backstop return? The catalyst for a return for private lending is a higher rate of return, which is exactly what the Federal Reserve is trying to inhibit. So while the exit strategy “briefs well,” is actually much harder to determine. This is also complicated by the idea that since the Fed is targeting lower rates, particularly for mortgages, their action is effectively a public good, and the idea that a public good will be withdrawn by policy makers in a timely manner is suspect.
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The rest of the speech is a documentation of current policies of the Federal Reserve and is also outlines a “toolkit” of ideas for the Federal Reserve to potentially use in the future. But generally, these ideas are only to backstop credit agreements in order to perpetuate further credit expansion. According to Chairman Bernanke, the unwinding of these facilities, or the exit strategy, should occur as normalized credit conditions return.
<o></o>
But this makes me wonder at what point does demand that securitized credit assets without a federal backstop return? The catalyst for a return for private lending is a higher rate of return, which is exactly what the Federal Reserve is trying to inhibit. So while the exit strategy “briefs well,” is actually much harder to determine. This is also complicated by the idea that since the Fed is targeting lower rates, particularly for mortgages, their action is effectively a public good, and the idea that a public good will be withdrawn by policy makers in a timely manner is suspect.
