The problem facing our economy is that toxic waste has infiltrated the credit markets.
Financial institutions are afraid both to lend and to buy financial paper, for fear that the borrowing or issuing institution has "unknown" amounts of toxic credit in its portfolios and may renege on a loan or paper obligation.
This is what you call a "credit crisis"!
Credit markets have seized up. It is not a question of liquidity or of interest rate cost.
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And yet, most Wall Street players and cheerleaders are positively bleating for a Fed rate cut as a salvation to their woes.
Today (September 10th) Telegraph.co.uk has a lead business article entitled, "Sadly, our fate is in Bernanke's hands."
Last Friday, even a senior U.S. politician sought to bring political pressure on our supposedly "independent" Fed, to lower its target rate.
[Editor's Note:Big Government Lies Exposed. Go Here Now.]
Commentators are saying that our stock markets are pricing in a Fed cut of some 0.75 to 1.00 percent. Talk about foolhardy!
It appears that almost everyone sees the Fed as key to bailing us out of a decade of reckless spending and investing.
We disagree strongly.
Why?
Because there is very little more good that our Fed can do; indeed it could do harm — pure and simple.
As the old saying goes, "You can lead a horse to water, but you can not make him drink."
"So true!" I can almost hear our readers shout; at least those with children!
A few weeks ago, when there was talk of a bank liquidity problem, we urged the Fed to cut rates, despite the risk of a falling dollar.
The Fed acted, brilliantly in our view. Within three days, the Fed cleverly lowered their discount rate — the rate they charge to major banks in the Federal Reserve System.
In common with most other central banks (with the notable exception of the oldest of central banks, the Bank of England) our Fed also pumped in massive amounts of liquidity for extended periods of time.
[Editor's Note:Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.]
So, our banks have had all the money they wanted at a lower cost.
Meanwhile, Fed Chairman Ben Bernanke talked soft and encouragingly to world markets, to help restore the confidence, so vital to our economy — an economy that has been in "retraction" for the past year and now looks headed for recession.
Amazingly, some economic pundits still feel our economy is fine and growing at 4 percent!
At the same time, the Fed held its high-profile "Target Fed Rate" steady at 5.25 percent, so steadying a potential collapse in or troubled dollar.
The Fed also appears to have twisted the arms of four of our largest banks to borrow $500 million each at the Fed Discount Rate. This was money the bank did not need. They were "encouraged" to borrow to encourage others.
The borrowing cost the banks a lot of money, and we do not yet know what they were given in return for their trouble.
All-in-all, we feel the Fed did an outstanding job.
But, despite the Fed Discount Rate cut and the availability of massive amounts of liquidity, banks would not lend — surprise, surprise!
Almost more importantly, the Commercial Paper (CP) died up, seriously restricting normally credit worthy small and medium sized corporations from access to the vital short-term funding of the CP market.
In short, despite ample cheaper funding the bank would not lend and, instead, invested heavily in the Treasury market forcing yield spreads to historic lows.
It showed us that the problem is not one of interest rates, but of credit.
No horse will drink if it smells toxic waste in the water, no matter how thirsty or how reassured by the owner.
So the crucial question, before "persuading" the Fed, is, what can the Fed do?
The cause of our present crisis is the "Great Inflation Lie" — about which we have long warned — leading to the reckless growth of low cost debt, leading to a massive asset boom, funded largely by means of highly leveraged derivatives.
The unwinding of the boom was triggered by the subprime mortgage market.
Ben Bernanke inherited this problem, he did not create it.
So how can the Fed help the subprime market?
The sad but realistic answer is, "not much!"
The dreaded Adjustable Rate Mortgages (ARM's) and most HELO's (Home Equity Loans) are geared not to the U.S government (Fed), controlled U.S financial market but to the free-market London Inter-bank (Eurodollar) Offered Rate, or LIBOR.
LIBOR is a "free" market rate, related to the U.S. FED rate, but not controlled by it.
So, how can a Fed rate cut either assure a lower LIBOR (offering some possibly temporary relief to the sub-prime market) or "force" our banks to lend when they are concerned about toxic waste in the financial system?
The sad answer, yet again, is "not much".
The mandate of our Fed is to control inflation and to encourage a growth economy.
[Editor's Note:Bernanke Reveals `Fiscal Crisis` Ahead]
A key element within these two, often contradictory mandates is to maintain the vital credibility in our currency.
It is not the job of our Fed to use taxpayers' funds to "bail out" individuals and institutions who may now be counting the cost of irresponsible greed.
That is the job of the "free" market.
So, we feel that Ben Bernake has done all that should be expected of him. Pressuring him to interfere and bail out the free market with taxpayers' finds is a recipe for disaster, forcing the coming recession into a far more serious depression, which will hurt us all.
We believe that a Fed Rate cut may bail out some people, but will achieve no good for our Nation, as a whole.
In addition, we feel that a Fed cut will seriously jeopardize our dollar, to the great detriment of our country in general.
Therefore, we are quite frankly amazed at the bleatings and highly irresponsible cries, coming from "respectable" people in the financial markets, for a Fed rate cut, or (taxpayer) bail-out.
In summary, we face a "toxic" credit problem, not a liquidity nor an interest rate problem.
There is no "legitimate" role for the Fed to play, other than to ensure money is available to the financial system, at a non-inflationary rate; to hold our dollar back from collapse; and to talk soft.
Despite the pressures, our Fed appears to us to be doing well, under great strains.
We feel that the only fair and effective "bail out" is the business of the "free" market.
If however, our politicians see a recession ahead, it is up to them, not the Fed, to take avoiding action, even if that be a "bail-out" for the greedy, financed by the prudent.
Editor's note:
Big Government Lies Exposed. Go Here Now.
Bernanke Reveals `Fiscal Crisis` Ahead
Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.
