Mortgage and Credit Crisis Reaches 9/11 Stature
It’s both good and bad news. Good because maybe, just maybe the Fed has come to realize just how serious our situation has become. Bad because, well things are very bad. At least we know the dilemma is on their radar.
Yesterday, the Dow sold off to the tune of 298 points in response to the Fed’s quarter point cut in the Fed Funds rate. Then to today they attempted to address our malfunctioning debt markets. The Dow shot up a couple of hundred points initially on the news but gave all but 41 points back by it’s close.
Ahead of Wall Street’s open, the Federal Reserve announced plans to ease elevated pressures in credit markets, saying it would inject cash into the markets through auction of short-term funds.
The Fed also announced foreign exchange swap lines with the European Central Bank and the Swiss National Bank. The Bank of Canada is also a partner in the liquidity plan. The first auction will be held Monday, Dec. 17.
The Fed’s action is significant because they haven’t deployed a strategy like this since 9/11/2001, as the International Herald Tribune points out.
It was the first time since the Sept. 11, 2001, terrorist attacks in New York and on the Pentagon that these central banks have coordinated their support of financial markets.
That’s right, the mortgage and credit crisis has reached 9/11 stature. It’s about time the Fed and central banks around the world wake up to the economic crisis that we are faced with. The first step in solving a problem is recognizing and understanding it. Perhaps they have taken the first step.
“This is not about particular financial institutions with particular problems,” a senior Fed official said in a background briefing for reporters. “It is about market functioning.”
Nor is it just about economic cycles as I pointed out yesterday. But there is doubt the plan is grand enough to work.
Economists and market specialists welcomed the Fed’s intervention but expressed some skepticism whether it would be enough to allay the biggest problems in the credit markets related to the sharp drop in the value of U.S. mortgage securities.
I agree, I doubt it’s enough to cure the disease. Especially when it’s rumored that Citigroup alone is holding 100 billion in SIV’s or structured investment vehicles. That’s just one player. So you can see 10 billion here and 20 billion there are mere bandaids on an open chest wound.
One thing we do know. The mainstream media, the politicians, the CEO’s and of course the central bankers haven’t shot straight with the public. Nor are they now. If they say it’s this bad, assume it’s ten times worse. The information is out there, but you need to dig for it.
One thing I found interesting in this move was that the banks could pledge sub-prime securities for collateral. So if a bank has a portfolio of junk which they can’t value and no one wants, they can now use this as the basis for the new loan. This isn’t quite a money dump, but it is close. This means that the central bankers now understand the consequences. I think we can expect bigger moves in January.