Wednesday, October 08, 2008

How to Unfreeze Bank Lending -

The WSJ proposes a plan whereby bank debt would be guaranteed for a period of time. One of the better ideas out there, but still worry about the moral hazard problem. Is 10% enough? See below.

How to Unfreeze Bank Lending -
"...the Federal Reserve should guarantee most of the short-term borrowing of well-capitalized banks for a small fee.

....Here's how the guarantee might be structured to dovetail with the federal bailout bill and constrain moral hazard. A bank could borrow up to a specified percentage of its tangible capital, with a Fed guarantee for a limited period such as three or six months. This limit should be designed to give enough time for new sources of lending to be generated by the federal purchases of troubled assets. The Fed guarantee would cover a large portion, say 90%, of the principal of these loans only in the event that the borrowing bank becomes insolvent. The non-guaranteed portion of these loans would give lenders the incentive to make intelligent choices and monitor the borrowers."
Which is better than anything I can think of with the exception of the lower rates, lower rates further, loer rates still further while increasing the money supply in ALMOST any way possible. (Which is not without its own potential problems).

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