Thursday, November 1, 2012

Trouble for the Fed?

I would imagine that articles like this recent one about dividend recapitalizations (registration at WSJ required) will give doves inside the Federal Reserve some pause. They have got to be worried about blowing air into yet another bubble. The market for leveraged loans is in the process of getting bubbly again; with yield on safer instruments held artificially low by the Fed, investors and banks seem to be getting sloppy again.

In my imagination, at least, the hawks within the Fed's walls, like Jeffrey Lacker of the Richmond Fed, are passing out copies of this article, saying "I told you so." Are the doves thinking twice, at least privately, and beginning to consider more seriously the idea that, as bad as doing less might be, it might be preferable to doing more?

The Fed will lose a lot of credibility if its fingerprints appear on another financial market debacle.

This is speculation on my part. I wish I could peek into those discussions now. Preventing another debt bubble is not the only thing that matters to the Fed's board members, but I'm sure they must be sensitive to signs of one growing.

Of course, part of the demand (not the supply) for dividend recap loans could stem from a desire to get ahead of tax increases on dividends that will hit at the start of the year. It will be interesting to see if the pace of dividend recaps changes next year.