In over their heads

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The Fed and Treasury decided ‘the problem’ was the LIBOR/Fed funds spread and threw everything they had at it.

What finally did the trick was the Fed’s unlimited swap lines with the MOF, BOJ, ECB, and SNB.

Unfortunately that turned a technical problem into a fundamental problem, as I’ve previously described.

Back tracking to why they wanted LIBOR rates lower- they wanted to assist the mortgage market and consumer debt in general.

There were other ways to do this, such as my plan for uncollateralized lending to their own member banks where government already regulates and supervises all bank assets and insures bank deposits.

That would have eliminated the interbank market for Fed member banks.

Euro banks would have still been paying up for USD borrowings and been distorting LIBOR.

The next step would be to get the BBA to adjust the USD LIBOR basket to not include banks who had to pay substantially higher for funds than the US member banks.

(This is supposed to happen automatically but the BBA is dragging its feet as it did with Japan years ago.)

And this would have immediately gotten LIBOR and Fed funds back in sync.

Also, they could have expanded treasury funding for the agencies to make mortgages to member banks in general for the same purpose and lowered mortgage rates that way.

Point- lots of other/better/more sensible ways that don’t increase systemic risk than the policy of unlimited (and functionally unsecured) USD lending lines for foreign commercial banks.

The ‘cure’ seems a lot worse than the new problems it creates.

Note the euro falling fast…