On my prior post about the real problem evident in the big banks' perfect trading quarters, commenter "HT" weighed in with some thoughts that I thought were worthy of their own post. I could probably write about 1500 words in response to this comment alone, but I think I'll just let it simmer for now, because it can stand on it's own:
"Sorry KD, I know you're working hard to understand the mechanics of the situation here, but isn't the real problem the inappropriately low Fed interest rate, not the banks that are able to benefit from a unusually tilted FICC environment?
And the low Fed interest rates are primarily due to the political desire to dampen the socio-economic impacts from many years of accumulated bad consumer borrowing behavior.
And that Tim and Ben know this policy is just giving money to the banks, even if that may not their direct intent? They might even be as troubled about this as you are?
But maybe they've played the scenarios and this is the best of the possible outcomes. That raising interest rates and increasing socio-economic stress at this moment would possibly result in public and congressional outrage directed at the Fed. That a congress that has not been strong in demonstrating its competency in understanding complexities of modern financial markets or macroeconomics may then take legislative action to cut back Fed independence and enact further restrictive policy measures on the US financial system.
And this endgame may be more damaging to the US in the long run than allowing the dynamic that you're appropriately critical of to just play out?
The banks are capitalizing on an unusual situation, but one that is rooted in the American citizen that is still relatively ignorant of their own role in causing the economic environment that's been created, and still has not faced up to their own personal accountability in taking on the pain required to restore health to our financial system. "
If I were going to sum that up in one sentence, I'd say that we're trading moral hazard for real economic pain. (We're gobbling a huge helping of moral hazard, in exchange for trying to avoid greater economic pain.) Ponder that...