From today’s Telegraph:
Central banks are trying to calm jitters by pouring billions of dollars into money markets to increase liquidity. Last week another $200 billion was dropped into the system. That was quickly swallowed up amidst screams for yet more emergency injections. Debt junkies, like heroin addicts, demand ever bigger fixes.
And this brings us to the heart of the matter. The rational response to financial pain is risk reduction. But if the pain is removed, or even suppressed, then so is fear. When individuals or institutions believe they will always be bailed out, they lose the incentive to reform. Delinquency is, in effect, encouraged.
In the end, the patient is so full of painkillers that they become part of the problem. The only way forward is for all palliatives to be washed out of the system. Sooner or later borrowers and lenders must address the real cause of discomfort. For many of Wall Street’s finest, it will feel like cold turkey.
"Cold turkey" is obviously not the strategy of the Fed or other central banks:
A chief strategist at a major US bank, who declined to be named, said the markets would focus on further intervention from central banks, which he said was "highly likely" to be announced before markets close for Easter.
He added: "It is not clear that cutting rates will help at all. Events are unfolding extremely quickly and no one knows what the game plan is. This is not a normal downturn - it’s not just about the price of money."
Home values still have a long way to fall and a huge downside risk to the credit market remains. The Fed and its counterparts have few silver bullets left at their disposal. How many institutions will be bailed out, and how long can this continue?
