The Fed is considering "unconventional" ways to avert a credit contraction, i.e. to keep pumping up the debt bubble, the WSJ reports today. They are looking at lending directly to non-bank financial institutions (I wonder, will my daughters' Piggy Savings and Loan qualify?) and buying bonds and mortgage-backed securities issued by FannieMae and FreddieMac (Mack the Knife's mortgage doesn't qualify - yet).
The Future of The FedThe Fed's desperate attempts at keeping the debt clunker going reminds me of those 1950's american cars in Havana held together with spit and bailing wire. While they frequently look quite nice on the outside, their guts have been almost entirely replaced with a hodge-podge of spare parts, usually of soviet-era provenance. Going over 20 mph in them is akin to a death wish.
If the Fed has its way - a GSE here, a private equity loan there - it will soon turn itself into a Havana Special. Oh what the heck... consider it environmental finance: recycling of garbage debt into tax dollars.
Update: Just a couple of hours after the above was posted the Fed announced its actions They are summarized in a Reuters article carried in their front page under the apt title "Floodgates Opened". Watch out we don't all drown...
One final thought: I have always been an advocate of "Don't Fight The Fed". But this is no longer my daddy's Fed - not even my own Fed. Instead of taking away the punch bowl, they keep on spiking it with as much rum as possible. How many cheap mojito specials can the Havana Fed serve up, before we all end up on the floor? Or it goes bust itself?
Wall St Bailout. Ah, free market capitalism at work.
ReplyDeleteIs it possible for the USA to implode as a somewhat cohesive society? Now most commentators (except Kunstler and his fellows) assume, that this financial mess is just a financial mess and nothing will happen to the American way of life. But in reality, the financial mess may well have some rather serious social consequences: unrest, random violence, civil war.
ReplyDeleteThe situation is really scary!
Amen.
ReplyDeleteMane the mean: Yes! Howard Katz has written about this at his website, the gold bug.
With today's Fed announcement (Fed to Lend $200 Billion, Take on Mortgage Securities), expect some weakness in commodities as the dollar gains some strength.
ReplyDeleteParabolic Commodities: The End is in Sight
It never ceased to surprise me that the FED ALWAYS perform DRASTIC ACTS right at stock market support and before falling apart.
ReplyDeleteYesterday SP500 is hitting right at its Jan 2008 low, so are other indexes. I suspected FED will do something big again.
I went long yesterday with my guts. Though I hate that FED is obviously intervening the market over and over (and yet lied about their timing is COINCIDENT), but it's a great opportunity to smell some extra fresh money!
The markets reacted quickly to this nonsense....
ReplyDeleteShort covering in equities, sell off in the bonds.....
They keep pulling on strings with little regard as to what the string is attached to.
I'm kinda of glad that you mentioned "The Havana Special". Being a Cuban myself. The least that you can say about the Cubans is that they are quite resourceful, more so, than what we are witnessing here. The Fed's action is nothing short of sophomoric, in every sense of the word. I am embarrassed for these drunken frat boys.
All these shenanigans have been so predictable. Ben Bernake and Hank Paulson with all their fancy, scholarly pedigree and financial acumen. Looking at them now you would have to think that a couple of bitches jumped over the fence.
Great post as usual Hellasious.
My best regards,
Econolicious
"Mack the Knife's mortgage doesn't qualify - yet"
ReplyDeleteLol. How timely. Looks like it does now. So as of today the dollar is backed by what, things like the business acumen of Countrywide and the credit bets of Bear Stearns? The no doc, bad credit, shady, insolvent or bankrupt broker's paper (AAA rated of course!) is now the collateral filling the Fed's asset base? How reassuring.
Maybe I should see if my landlord will take Euros, Pounds, gold or something, anything, other than the dollar. Why anyone should still hold dollars, other than for immediate liabilities, is a mystery to me.
FormerlyknownasJS
I feel this is a Bush-Cheney attempt to pump the economy prior to the election. With the typical Texan attitude exploit your resources for short term gain the political pressure is to keep Republicans in office.
ReplyDeleteshawn,
ReplyDeleteCan I safely assume you're viewing this as a tradable "bounce", rather than anything of meaningful substance? Gotta wonder how long Mr. Market will stay under the ether, LOL.
Jan
@Weiner. This "3rd slap on the face" will not help until November. They have to find more resources before November. But they do not have much left (half of Fed's resources used up already).
ReplyDeleteHi hellasious,
ReplyDeleteStill following your blog with great interest. I remember challenging the role of the US dollar in this comment section a couple of months ago.
You were still relatively supportive of the currency. What is your opinion now? Mine is made. I'd say that is has not changed.
I'm one third in gold, the rest being euros (my native currency) and occasionaly a short positions on Spanish banks.
I'm sorry to be this way. I used to be an "investor"...
François
Dear Francois,
ReplyDeleteI am supportive of a strong dollar policy and not of what is happening today, which is the trashing of the dollar's role as a storehouse of value.
But perhaps there will soon be enough debt destruction to make dollars scarcer and thus more valuable..
Regards,
H.
They are not spiking the punchbowl for everyone, only the banks. Until they cut the FF rate target, they are sterilizing all this extra lending to the banks, by taking the same amount out of the broader economy via open market operations.
ReplyDeleteIn other words, they take the money from us and give it to the banks. It's that simple.
At least in Cuba they have the sun. Really.
ReplyDelete