One of the cornerstones of the government bailing out the credit markets was that the Fed would buy up Treasuries and other bond instruments in an attempt to help improve the markets in these types of debt.
If the plan was essential to re-building the financial markets, then the economy is in for another problem.
According to The Wall Street Journal, “A growing number of the dollars the Fed is lending out to revive markets are long-term loans. Those long-term commitments could be difficult to pull back when the economy recovers and the Fed wants to drain the financial system of cash to raise interest rates.”
What if the Fed stays on the sidelines? The Treasury’s attempt to recapitalize banks and restart consumer lending may be undercut. If there is no buyer for the huge pools of debt in the marketplace, their values may stay depressed. Money to buy assets from troubled banks may never make it into the market. The idea the private equity will invest with the government to buy toxic assets from financial firms could lose a major impetus.
The Fed was supposed to help support the economic recovery. It may end up hindering it.
Douglas A. McIntyre