What Cheap Money Means for Banks

http://www.futureofcapitalism.com/2010/08/what-cheap-money-means-for-banks

Arpit Gupta writing in Economic Polices for the 21st Century: "the Fed's decisions to provide increased amounts of liquidity and perform extraordinary operations during moments of crisis distort the incentives for banks. Instead of operating a stable capital structure and preparing for the eventuality of losses, banks can instead operate in a risky and leveraged manner –while counting on central bank provided liquidity-support in the event of a crisis."

That echoes David Stockman's highly flawed but nonetheless right about some things piece in the New York Times the other day: "Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money ...the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state....They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn't been able to obtain virtually free money from the Fed's discount window to cover their bad bets."

by Ira Stoll  |  Aug 11, 2010 at 8:52 am Related Topics:  Banking, Capital Markets Regulation, Federal Reserve, Press receive the latest by email: subscribe to the free futureofcapitalism.com mailing list