Economic Headlines 5/2/2008

Continuing the parade of conflicting economic news, the employment report showed the US economy shedding fewer jobs than forecast and the unemployment rate unexpectedly dropping to 5%. Meanwhile, car sales came in at a lower-than- forecast 14.4 million annual pace in April, the fewest since 1998. The Fed has raised the amount of cash it will offer to banks via the Term Auction Facility to a total of $150 billion in two auctions from $100 billion. The Fed is also increasing the type of collateral it will take in its Term Securities Lending Facility (the treasury/MBS swap totaling $200 billion) to include auto loans and credit cards. What the Fed should do is accept canned goods as a hedge against one of its counterparties going bust. That way, the Fed can always ease some more, cause food prices to skyrocket and then sell the canned goods for a profit. I believe that the changes to the Fed's programs are a strong indication that the Fed is finished easing and will attempt to use these sources of liquidity to help ease conditions in the credit markets. This is the best course of action to attack the liquidity problem in the banking system. However, we are once again confronted with the issue of moral hazard. This only encourages banks to take greater risks if they can always rely on the Fed to bail them out. If something goes wrong and one of these banks defaults on its loan to the Fed, and the Fed discovers the collateral it holds is worthless, guess who ends up with the bill? I'll let you mull that one over for awhile but I think you already have a good idea.