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Inside Washington (02/11/2010)
* WASHINGTON (2/12/10)--A commercial real estate (CRE) crisis may be on the horizon, and there are no easy solutions to mitigate the risks CRE may pose to the financial system or the public, according to a Congressional Oversight Panel report released Thursday. The report said that CRE markets will likely suffer “substantial difficulties” over the next few years. Any approach to the problem raises the risk of moral hazard, subsidization of financial institutions or providing a floor under otherwise undercapitalized institutions. The alternative is to accept bank failures and sell the assets at a discount, the panel said. “The panel is concerned that until Treasury and bank supervisors take coordinated action to address forthrightly and transparently the state of CRE markets--and the potential impact that a breakdown in those markets could have on local communities, small businesses and individuals--the financial crisis will not end,” the paper concluded ... * WASHINGTON (2/12/10)--Federal Reserve Board Chairman Ben Bernanke’s written statement--released Wednesday--regarding the central bank’s exit strategy has garnered mixed views from economists (The New York Times Feb. 11). Though his testimony before the House Financial Services Committee--originally scheduled for Wednesday--was postponed due to snow, Bernanke released a statement that indicated, among other things, that the Fed could raise the discount rate. Bernanke didn’t specify when the exit plan would be implemented. If interest is paid on excess reserves, inflation could skyrocket, according to Laurence J. Kotlikoff, Boston University economist. Hyperinflation could happen overnight because the supply of money would be increased by a factor of three, he said. The Fed also printed new money and distributed it to banks, and is now trying to prevent the banks from releasing the bills into public stream. That’s what the interest rates on the reserves are, he added. Ricardo Reis, Columbia University economist, said that with the proposed changes, the Fed can now return to its “boring” balance sheet. The increase in reserves plus interest on the reserves are good things and should remain, he added ...


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