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 and other assets 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 enabled the banks–and bankers–to make a killing over the past year. The question is how the Fed can reverse this stimulus without killing the economy.
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. The banks are, however, lending to the Federal government, which needs to fund record deficits by borrowing more than $1 trillion a year. The combination of the Fed’s desire to stimulate lending via cheap money and the government’s desire to stimulate the economy by running a huge deficit has made it a great time to be a bank: Banks can borrow from the government at artificially cheap rates and then lend the money back to the Federal government at higher rates, pocketing the difference.
And now it’s going to get even better to be a bank. Why?
Because the first part of the Fed’s exit plan will reportedly be to – Read full article…
