Friday, March 21, 2008



Pawn shops are reporting a dramatic uptick in business. Pawn shop owners and other less directly involved observers attribute this bonanza to two factors. First, with the price of gold (still) near record levels, people are taking advantage of a perceived opportunity by pawing jewelry, other baubles, and even gold teeth and fillings, the last an especially dyspeptic notion. Second, in this wonderful economy we are experiencing (“the greatest story never told,” as Larry Kudlow never stops telling us), people are having a hard time making ends meet (which, admittedly, might have something to do with the size of the ends) and thus are turning to what is perhaps the world’s oldest financial institution for help. Often, those seeking to cash in on gold’s rise and those struggling to pay their bills are the same people.

As I was contemplating this development, a thought came to me. Now that the Fed has opened its discount window, formerly restricted to commercial banks, to securities firms and has agreed to take all manner of collateral, including dicey mortgage backed paper, the Fed has become Wall Street’s pawn broker. (The Wall Street Journal reports that, as of last Wednesday, the Fed had $28.8 billion outstanding under this facility, so this program is not a mere confidence fortifying backstop.) This analogy is, of course, strained for three reasons.

--Pawn shops demand better and more (on a per dollar basis) collateral than the Fed.

--Pawn shops generally deal with a higher class of clientele than the Fed, or at least this is the case under the new “wide open window” policy under Obsequious Ben Bernanke.

--If the pawn shop owner has to seize collateral (as he usually does) and sells it at a loss, it is his problem. He bears the loss. If the Fed ends up having to seize Wall Street’s collateral and takes a loss, it loses the money, like the pawnbroker. However, the Fed, while not formally an agency of the federal government, remits a substantial chunk of its profits to the U.S. Treasury. Last year it distributed $34.4 billion to the Treasury. This is money on which the federal government relies. (Whether it should is another matter.) If the Fed’s profits fall, as they will if they take losses selling malodorous collateral, less money will be remitted to the Treasury and thus spending must be cut (Ha!), taxes must be raised, or, most likely, more money must be borrowed to make up for the shortfall. Since the interest and the principal (eventually) on these borrowings must be paid by the taxpayers, you, or your children, are ultimately responsible for the Fed’s new “Pawnshop to Wall Street” venture. Of course, if it all works out, the Fed will make a profit on this business and the taxpayers will be commensurately rewarded. That could happen, but this probably wasn’t what the founding fathers had in mind when they created the Fed. Oh, wait…the founding fathers didn’t create the Fed, did they? But I digress.

You didn’t know that you, as a taxpayer, have now been put in the pawn shop business, did you?

On a far more important note…

Have a blessed Triduum (I know I am a day late here.), a holy Easter. God bless you all, at this most sacred time of the year, and always.

1 comment:

Anonymous said...

So in this pawn shop analogy, where does Bruno, the scruffy faced tough that stands in the corner of the pawn shop and maintains discipline among the clientele fit. If, I as the taxpayer am now in the pawn shop business, I want jto know fi I have a 'Bruno' who will keep the customers honest.