The combination of monetary policy and industrial policy has been coined "Mondustrial policy" by John Taylor. We are seeing this at work with the announcement that the TALF program will be continued while the Treasury purchase program will be ending. The TAF loans to banks will also be cut by one-third.
The TALF program will be extended through March 31, 2010 for ABS and there will be given a six month extension for new CMBS. Everything is not perfect in credit markets and the Fed is still needed to provided selected credit capacity for the ABS market and especially for the CMBS market which may be the next problem area. Commercial real estate has been hit hard but has taken a back seat for the rest of the market.
The mondustrial policy becomes an issue because the government has now selected extended and cut programs not based on overall economic price stability but on the needs of the banking industry. This is a slippery slope. Do we do nothing and have a collapse in sector lending or do we allow the government to "fix" specific areas?
Of course there is a need for more credit to the commercial real estate market to prevent defaults but choices will have to be made. For example, more commercial real estate loans are held by smaller banks. You could prevent money from going to these areas and there will be further bank consolidation, or you can allow smaller institutions to be serviced. This is not exactly the case for the CMBS market but allowing for more money to flow through these lending facilities takes pressure off of other institutions.
The overarching theme is what should be the role of the central bank within the banking industry. This is a debate that is not occurring. Politicians are more than happy to be involved with directing programs but should the central bank be the instrument of this industrial policy?
The TALF program will be extended through March 31, 2010 for ABS and there will be given a six month extension for new CMBS. Everything is not perfect in credit markets and the Fed is still needed to provided selected credit capacity for the ABS market and especially for the CMBS market which may be the next problem area. Commercial real estate has been hit hard but has taken a back seat for the rest of the market.
The mondustrial policy becomes an issue because the government has now selected extended and cut programs not based on overall economic price stability but on the needs of the banking industry. This is a slippery slope. Do we do nothing and have a collapse in sector lending or do we allow the government to "fix" specific areas?
Of course there is a need for more credit to the commercial real estate market to prevent defaults but choices will have to be made. For example, more commercial real estate loans are held by smaller banks. You could prevent money from going to these areas and there will be further bank consolidation, or you can allow smaller institutions to be serviced. This is not exactly the case for the CMBS market but allowing for more money to flow through these lending facilities takes pressure off of other institutions.
The overarching theme is what should be the role of the central bank within the banking industry. This is a debate that is not occurring. Politicians are more than happy to be involved with directing programs but should the central bank be the instrument of this industrial policy?
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