A former chief economist at the U.S. International Trade Commission is questioning why despite unprecedented intervention by the Federal Reserve, lending is still on lockdown, especially by regional banks.
Writing in the Kansas City Star on Jan. 5, guest columnist Peter Morici wondered if the preferred cure of knocking the federal funds rate and its short-term bank lending rate to near zero is really the right medicine after all.
“Conventional mortgage money and business loans remain too scarce, as regional banks, which are the arteries and capillaries of our credit system, remain short of lendable funds. Near-zero short-term lending rates for banks do little to help, because the regional banks do not lack for short-term access to funds — the Fed is providing all the near-term liquidity they want through the discount window. Rather, banks lack longer-term sources of funds to back up mortgages and commitments for medium-term lines of credit to business,” wrote Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.
Since the savings-and-loan crisis of the late 1980s, regional banks have relied on deposits and the sale of mortgages and other loans to money-center banks in New York to finance home and business loans, he wrote. Then those loans were purchased by insurance companies, pension funds and other fixed-income investors, all of whom have very predicable cash-flow requirements. But in recent years, those investors were burned by shoddy subprime mortgages packaged into bonds.
“These schemes were central to the subprime crisis, housing bubble and collapse,” he wrote. “And now to the crisis of confidence on Wall Street that has poisoned credit markets globally.”
“Ultimately, Fed chairman Ben Bernanke should gather the CEOs of the large money-center banks, which have received direct infusions of capital from the Treasury and huge loans from the Fed, together with the biggest fixed-income investors to define the parameters of acceptable mortgage-backed securities,” he wrote. “Then it should require its wards on Wall Street to buy loans from regional banks and bundle those loans into bonds for sale to fixed-income investors. The Fed could also buy bonds backed by conventional mortgages, just as it has Fannie and Freddie securities.”
In the end, though, the Fed may have to start lending to the regional banks against solid, prime conventional mortgages and hold the mortgages or securitize those for sale to fixed-income investors directly or through primary securities dealers, Morici wrote.
“This is all well outside the limits of what the Fed has done since World War II and perhaps ever done, but these are dangerous times,” Morici wrote. “Simply, the Fed is running out of conventional monetary policy and bond market options. In the end, if the New York banks won’t do their job, the Fed may have to do it for them.”
This article was submitted by Kathleen O’Connor, a contributing writer for Biz2Credit. Biz2Credit is a small business marketplace that provides entrepreneurs with the latest industry news and financial advice. Send all questions to email@example.com.