A FEDeral case of a C(ri)ITIcal situation

NYT reported today that "Plan to Rescue Citigroup Begins to Emerge." Apparently, "Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to people briefed on the talks, who spoke on the condition that they not be identified because the plan was still under discussion."

The WSJ has an article titled "Fed Has More Ammunition After Firing Rate-Cut Bullets" in which the writer presents some additional steps the Fed could take, in addition to reducing the short term rates to 0%. One of these would be for the Fed to buy long-term debt, including Treasuries and debt of Fannie and Freddie. This would be incestuous, if it happens.

The actions of the Fed and the Treasury are emblematic of the tail wagging the dog phenomenon. Equity and debt are not risk-free. It was the assumption, on the part of quite a few, that there was no risk associated with these "investments" that has caused the current mess. Rather than focusing on the fundamentals, i.e. education and job creation, the government is focusing on the financials. Risk-takers have to accept the downside. To the extent that regulatory failures contributed to the current mess, both the bureaucrats and the members of Congress on the appropriate committees should be held accountable.

Obama has announced a job creation program over the weekend. I have not had the time to take a look at the details. The key is the cash flow to support the investments. Apparently, Obama would not raise the tax rates for the 'wealthy' back to pre-Bush levels, but would just let them expire in 2011. This would signal that Obama is not concerned with debt levels and will add more deficits. Perhaps he will follow his guru, Ronald Reagan, in creating record deficits.