- On November 30, the Fed, ECB, Bank of England, Bank of
Japan, Bank of Canada and Swiss National Bank acted together to cut the
rate on dollar liquidity swap arrangements by 50 basis points. Markets
surged. Irrationally trumped reason.
- What, in fact, was accomplished? Swap lines were always
available. From 2007 - 2009, they were initiated or expanded globally four
- Lowering the price modestly was done to ease pressure
on troubled Eurozone countries. However, funding isn't the problem. It's
solvency. Nonetheless, the ECB perhaps agreed to be lender of last resort,
at least to some degree.
- Expanding its balance sheet may lower sovereign debt
yields. At issue is the ECB's ability and willingness to tackle a $6 trillion
debt problem when serious restructuring is needed. Kicking the can further
down the road won't work.
- Fundamental problems remain. Adding more to unsustainable
levels compounds crisis conditions. Radical monetary surgery is wrongheaded.
At best, short-term gains will cause far greater trouble ahead. Analyst
Yves Smith asked, "Does Anybody Who Gets It Believe Central Banks
Did All That Much Yesterday." Comments below followed:
- Economist Paul Krugman commented, saying:
- The November 30 announcement "looks to me like a
non-event. Yet markets went wild. Are they taking this as a signal that
substantive action - like the ECB finally doing what has to be done - is
just around the corner? Are they misunderstanding the policy? Was this
cheap talk that nonetheless moved us to good equilibrium?" If so,
it's not enough. Italian bonds still top 7%.
- Pimco's Tony Crescenzi believes "liquidity is no
substitute for other actions that Europe must take to solve its current
woes. The world continues to wait on European actions on fiscal rules,
discipline, and enforcement, as well as use of the balance sheet that matters
most in the current situation: the European Central Bank."
- Smith also wondered why markets reacted so positively
to what little, in fact, was done. He also focused on two underreported
issues, including acute withdrawal of dollar funding from Eurobanks.
- As a result, he believes coordinated Fed action was less
about reducing interest rates and more about systemic seizing up. The response
was "telling the markets they were on the case."
- However, "this is giving a probably dying patient
emergency oxygen when he needs to be put in intensive care."
- Smith also mentioned Nouriel Roubini saying Italian sovereign
debt needs to be written down. If the ECB buys it, "the result will
be that pretty much every private holder will hit its bid. And he doubts
the ECB is prepared to balloon its balance sheet up" to $1.9 trillion
- That amount deals with Italy alone, excluding five other
troubled Eurozone members.
- Commenting on Italy's unstable condition, Roubini said
it needs "a primary surplus of 5 per cent of (GDP), not the current
near-zero, merely to stabilize its debt. Soon real rates will be higher
and growth negative. Moreover, the austerity that the (ECB) and Germany
are imposing on Italy will turn recession into depression...."
- Roubini also said debt restructuring is needed with investors
sharing the burden to reduce public debt "to at worst 90 per cent
of GDP from the current 120 per cent."
- However, with bondholders unwilling to take losses, resolution
won't be forthcoming. Instead of tough action, policy measures have lurched
from one bad solution to another. As a result, expect more stopgap measures
after current ones fail.
- Nomura's banking research head Jon Peace said coordinated
Fed action stems from a three-year old crisis. "Back in 2008, there
was a lender of last resort - countries bailed out the banks. This time
it is governments that need a lender of last resort - but there is no obvious"
one available to handle a crisis this great.
- Moreover, warnings accompanied November 30's announcement
about its seriousness. France's central bank governor, Christian Noyer,
said "We are now looking at a true financial crisis - that is, a broad-based
disruption in financial markets."
- Phoenix Capital Research asked, "What Does the Fed
Know that We Don't," saying:
- "The whole thing smells fishy....Aside from the
fact that the Fed leaked its intentions....Monday night," something
- Action perhaps was to help institutional investors and
insolvent banks like Bank of America. Moreover, other tried options failed.
The Fed stepped in to help. "That alone should have everyone worried....about
how dire things had become in Europe."</blockquote>
- Of greatest concern is that coordinated Fed action solved
nothing. It was little more than feel good. Troubled Eurozone countries
have unresolved solvency issues. Lowering interest rates won't help. All
it does is provide easier credit "which, of course, is the entire
problem to begin with."
- Banks are highly leveraged. Progressive Radio News Hour
regular Bob Chapman says 70 to 1.
- At this level, small losses can mean bankruptcy. Providing
more liquidity makes a bad situation worse. Core issues remain unaddressed,
including too little capital and too much leverage when economic conditions
are dire. It's like betting against the house that always wins. Only fools
- At best, coordinated Fed action bought time, but not
much. "Neither math nor common sense indicate that this will turn
out well. Indeed, when this mess finally comes undone, it's going to make
Lehman (Bros.) look like a joke."
- "We're now talking about entire countries collapsing,
not just private institutions."
- Naive investors will lose everything. It's no time to
be brave and bold.
- Stephen Lendman lives in Chicago and can be reached at
- Also visit his blog site at sjlendman.blogspot.com and
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