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?
The moves by the Fed so far have not been made because they will bring our economy to a sound economic footing, but because they avert disaster for another day or so– regardless of the cost down the road. Is it time for central banks to deal with withdrawl symptoms today, for the sake of a sounder economy tomorrow, or should they just keep putting out brush fires, and praying that the sparks don’t travel any further?
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It seems like this whole debate regarding bailouts, cutting rates, and fighting inflation is showing how the Fed is much more of a political animal than perhaps it ought to be.
It’s pretty obvious to me that Paulson and the government hope that by bailing out one of, if not the, most exposed players in the game (Bear Stearns), they will be restoring faith and “normalcy” to the whole mortgage market, perhaps even the entire credit/spread market as a whole. Part of that faith would have to be derived from the belief that the Fed was going to bail out ALL of the major players, if necessary, no matter what the cost of the dollar. I guess that if the government assumes they can sell 5-year paper at 2.5%, they still have credibility as a lender/buyer of last resort. The people who don’t think that credibility exists are probably buyers of gold at $1000/oz.
Not that anybody asked, and not that the “R” word is particularly significant, but if you believe there was any causal linkage at all between housing price increases and GDP growth, or between cheap, plentiful finance and GDP growth, the notion that the economy is merely “slowing” is absurd.
Twist,
There is only so long you can put off the inevitable and I think we are very close to the tipping point right now. The longer we drag this out the worse it will get. I kinda feel sorry for Big Ben, he inherited this from Greenspan(the creator) and now he is left to deal with a Kobayashi Maru….we need Captain Kirk
http://www.youtube.com/watch?v=xDE8pjiCnSw
http://www.youtube.com/watch?v=8LAA9SK2sM4
could not help myself on the last one…we all need a good laugh now and then!
In the end, they’ll do exactly what I told them to do in my book, John Ryskamp, The Eminent Domain Revolt.
They’ll ban housing evictions and enforce the New Bill of Rights.
Unfortunately, there will be MANY dead bodies between now and then.
Hi John,
I’ve got to admit you got in some good licks early on in the process. I’m still figuring the denial ends when FNM and FRE really tank (maybe this week) and Congress has to take charge of all that agency debt and guarantees.
The Cold War was really a bipolar system, and ’08 is just the second shoe; when the Soviet Union fell after ’91 this week’s Saint Patrick’s Day Massacre became inevitable, it was just a matter of time. Now America lurches to the left just like Russia had to lurch to the right for a while in the 90s. Within the last couple of days I’ve seen references to state-level foreclosure moratoriums during the 1930s (I think that was a Mike Whitney link V sent out), so you were probably right about the eviction ban too.
By the way, the gold focus is silly. Money is nothing more than a social contract, and the next few years are going to be an excellent education into how the rules on that contract work. Hedgies and IBs who took home $100s of millions a year or more broke that contract and sowed many of the seeds for this whirlwind. At least, Bankers the Next Generation will take their fiduciary duties dead seriously
Dang! After almost 10 months I finally got a full price offer on my house (after lowering the price 16%). Now i/fwhen I get what’s left of my equity out (I’m only out $6K plus commission over 3.5 years – not too horrible), I have to worry about whether my cash will lose value faster than my house.
I know we’re all against moral hazard, but does anyone else get the feeling that there won’t be many banks left standing when the dust settles? (I’m feeling so self conscious, since it seems to be open season on mixed metaphors this weekend).
On the chance that I actually make it to closing in 2 weeks, does anyone have any suggestions for a nice safe bank or credit union in Austin where I can park my life savings? I know WaMu is out of the question.
Money should be safe in any bank, we’ve printed so much of it. You just won’t earn any interest on it because the bankers are scammers. I went with ING direct because they actually give you some kind of return but with these fresh cuts that is pretty much parked money at about 3 percent, losing value because of inflation.
Congratulations, with the rate cut tomorrow someone’s got to be buying. I put my home up for sale on zillow, I’m not really serious about selling (hate moving), but I would for the right price.
Dollars may not be worth much but in your pocket is better than a bank. Now where do I bury the loot?
Brucewho-
I’ve been considering products that should do well in a down economy. I’ve been thinking that mattresses that have a built-in safe might be a popular product…
It may not be the beginning of the end, but it most certainly is the end of the beginning…
Not Pretty…..
The bank will give investors 0.05473 shares of its common stock for every one share of Bear Stearns stock they own. Including shares in an employee-incentive plan, the purchase price would be as high as $270 million. JPMorgan may not buy those shares.
So, for those of you a bit math challenged, that means that whatever money your fund/firm/401K spent on Bear Stearns – you know, way back on Friday, when it looked cheap – are now looking at best getting maybe 2 cents on the dollar.
And you wonder why they record the calls, do you?
Not anymore ya don’t…..
tc: I have been wondering about that too as far as banks. I pulled out of Countrywide. I went to Wells Fargo. Does anyone have any dirt on Wells Fargo? I am hoping they are safer than Countrywide but I might be incorrect about that.
I think that a really big white elephant in the room that no one is talking about here are pension/retirement plans. You wonder why the fed would so willingly pump sooo much money into the system to protect the “bankers”?
I think the answer is that you have the largest generation in the world retiring in the next 5-10 years and they are about to watch what they thought was a consevative approach to their pension evaporate before their eyes. The biggest players out there right now besides the investment banks are not saying much and I for one think thats a huge warning sign.