Panic Now, Avoid The Rush

2/05/09

Panic Now, Avoid The Rush
by Lee Adler

The Treasury Borrowing Advisory Committee (TBAC) released its quarterly advice to the Treasury yesterday. This is public domain stuff, and since I haven’t heard much mention of it in the mainstream media, I am reposting it here in its entirety. This is an unfolding horror story. This report paints a picture of the financial apocalypse the US government faces in stark detail unlike anything you will ever see in the mainstream media, and just about anywhere else except the most hard core permabear websites. Remember, the piece you are about to read is published by the US Government, Department of the Treasury. That makes it all the more frightening. Read it and weep.

Since the Committee last convened in early November, the contraction in economic activity has deepened and broadened, while financial markets have remained under duress. The unprecedented volatility present in capital markets when the Committee last met has diminished somewhat but conditions still are exceptionally challenging. Policy efforts have begun to unlock credit for select high-quality borrowers. But the magnitude of wealth destruction, the still heightened cost of economy-wide capital and the impaired system of financial intermediation continue to cast a dark cloud over the economic outlook.

Monetary and fiscal policy action now being implemented will help to prevent an even more serious downturn than otherwise would be the case. Policymakers’ efforts to restore the flow of credit to households and businesses, backstop critical financial intermediaries through capital injections and loan guarantees, and stimulate economic activity via lower interest rates, tax cuts and government spending are positives. Nonetheless, the necessary deleveraging of both the financial and household sector is considerable and has further to run.

Price pressures are receding rapidly. Headline inflation already has collapsed toward zero due in large part to the steep declines in commodity costs. More notably, core inflation also is cooling quickly amid the slump in demand and rising unemployment and remains close to the Federal Reserve’s comfort range for this series. Moreover, the speed at which businesses are cutting headcount and reducing compensation is raising the risk of deflation. Given elevated debt levels, such an outcome would be extremely problematic for the financial sector and real economy.

Federal Reserve officials have dropped the funds rate to effectively zero and are focused on using the bank’s balance sheet to help to restore the flow of private sector credit. Forthcoming implementation of the TALF program to restart the flow of credit in the asset-backed securities market is one example of the Fed’s efforts, as is its ongoing purchases of agency and agency-backed mortgage debt. Additional asset purchases – including the buying of Treasury securities if the FOMC determines that such purchases would be “particularly effective in improving conditions in private credit markets” – also are possible.

more:
http://wallstreetexaminer.com/2009/02/05/panic-now-avoid-the-rush/