The Fed's "Exit Plan" Is Just Another Secret Gift To Wall Street

Business Insider | February 8, 2010
Henry Blodget

The Fed is planning to detail its "exit plan" this week, the WSJ says. This exit plan is the means by which the Fed will gradually reverse the tremendous stimulus it is still pumping into the economy and financial system.

As we've noted often over the past year, the Fed is in a bind. During the financial crisis, it bought hundreds of billions of dollars of real-estate loans and securities from banks to reduce mortgage rates and ease the pressure on bank balance sheets. This, in turn, pumped hundreds of billions of new dollars into the economy, which has helped the banks--and bankers--to make a killing over the past year. The question--the bind--is how the Fed can reverse this stimulus without killing the economy.

And the initial answer seems to be...By giving the banks yet another gift at taxpayer expense.

The idea behind giving the banks cheap money was that the banks would lend it to consumers and businesses. Unfortunately, that hasn't happened: Since the start of the crisis, bank lending has fallen off a cliff (see chart at right).

The banks are, however, lending to the Federal government, which needs to fund record deficits by borrowing more than $1 trillion a year. Banks are also collecting interest--currently 0.25% a year--on the $1 trillion or so of "excess reserves" (see below) that they aren't lending to anyone.

Full article here