Investing in Real Estate :Circle The Wagons

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When the hostiles are charging and you’re out of ammo, you start throwing things. That’s where the Federal Reserve is today. Having flooded the financial system with liquidity and pushed interest rates down to zero for banks, they have now moved to pump more funds into the system. Yesterday’s action was the equivalent of throwing stones after all the guns have been fired.

The dirty secret of monetary policy is that it cannot force anything. It persuades, cajoles and uses market channels to try to get banks and other financial institutions to do what it wants but it can’t mandate any action (unlike fiscal policy which operates through the enactment of laws that must be obeyed–or, in the case of taxes, circumvented). So while the Fed has done what if can do, the banks sit on their hands, refusing to lend and thus stimulate a naggingly moribund economy. Rather the banks have used the liquidity to play the short term securities markets and increase their profits. To the extent that these profits have been returned to the government in the form of repaid TARP money, we the people benefit. But most of these profits have been held in the banks, pushing up their stock prices and increasing the wealth of bank owners and executives.

The Fed has done what it can. But if monetary policy is going to help this economy grow, the banks need to step up and do their duty, instead of behaving like pure profiteer who don’t care whether the economy shrinks or grows.

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