Confidence and the Fed - NYT

The New York Times just reported an interesting piece of spin on the credit situation in which Presidential Candidate and Senate Banking Committe Chair Chris Dodd (D) of Connecticut expresses his confidence in Bernanke:

“I think the Fed gets it” about the seriousness of the problem, Mr. Dodd said after a meeting this morning with the Fed chairman, Ben S. Bernanke, and Treasury Secretary Henry M. Paulson Jr., to discuss steps to stabilize the markets and stave off home foreclosures. But he added, “I’m still concerned that Treasury doesn’t understand the importance of the issue.”

In fact it is all about confidence, (and the lack thereof) but not so much in the Fed's ability to guide economic stability. It is an uglier lack of confidence: a lack of confidence in US housing and related debt, a pillar of our economy.

Bernanke dropped the rate that the Fed charges banks for emergency loans by .5%. The dirty little secret is that banks don't want to borrow, even at the reduced rate! The total outstanding amount of loans from the discount window last week was $294 million, utterly minute. The Fed may well ultimately reduce the Fed Funds rate, but they have not yet. Meanwhile short term bonds have dropped over the past few days. The 3 month T-Bill is yielding under 3% today, vs almost 5% a week ago. It has dropped 200 basis points, indicating a huge flight to safety away from long term debt.

The lack of confidence in debt and real estate will continue to play out in the market, and there will be more pain. Bernanke needs to and will drop the Fed Funds rate of course, but the dollar will be hammered. There will be global implications. People will realize, maybe the paper currency of an over in-debted country isn't money either.