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Devaluation of Currency
November 17, 2008

Is the Fed running out of options to quickly fix the credit crisis and economy?

Currency Devaluation

“Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank has ‘done about as much as it can do’ to revive the economy, which has worsened faster than he expected.

‘Interest rates are extremely low,’ Hoenig said today in an interview with PBS's Nightly Business Report.  ‘The fact that we have the recession now is a little bit more than what I had anticipated,’ he said in a transcript of an interview provided by the show prior to a scheduled broadcast tonight.

The Fed has tried to mitigate the worst credit crisis in seven decades by reducing the benchmark interest rate to 1 percent and channeling more than $1 trillion in loans to banks and other financial institutions. Some central bank credit has gone to non-banks, such as insurer American International Group Inc., and U.S. automakers are also seeking federal assistance.

Policy makers should provide emergency lending programs only to financial institutions that create credit and handle payments, Hoenig said earlier today in a speech in New York.

‘The focus should be on protecting the intermediation process and payments mechanism,’ he said.  ‘I would argue for at least drawing a sharp line between banking and commerce, with our discount window only used to fund institutions and markets that play strictly a financial role.’

President-elect Barack Obama said yesterday the government needs to provide a ‘bridge loan’ or other help to auto companies on condition that management, labor and lenders come up with a plan to make the industry ‘sustainable.’

‘For the auto industry to completely collapse would be a disaster,’ he said in an interview broadcast on CBS News's ‘60 Minutes.’

Federal Aid

General Motors Corp., Ford Motor Co. and Chrysler LLC need federal aid before Obama takes office Jan. 20, United Auto Workers President Ron Gettelfinger told reporters on Nov. 15.

Democratic lawmakers would like to use part of $700 billion in bank rescue money approved this year to help automakers, a move opposed by U.S. Treasury Secretary Henry Paulson and President George W. Bush. An impasse in Congress may put more pressure on the Fed to provide temporary assistance.

Loans and other assistance from the Fed and the Treasury have brought several unintended consequences because the U.S. lacks a framework for aiding troubled non-bank financial institutions, Hoenig said.

‘Many of the steps taken have raised important issues with regard to moral hazard and the subversion of market discipline, equitable treatment of different institutions and segments of the market, and public interference in credit allocation,’ he said at an Institute of International Bankers conference.”

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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