Liquidity Flood Is Not Getting Stock Market Drunk. One Reason Is Fear of Banking System Insolvency
The Federal Reserve joins with world central banks to slash interest rates, which are already very low. The Fed is buying commercial paper -- short-term debt that companies use to finance day-to-day operations. Now the government is thinking of taking ownership positions in U.S. banks, as Great Britain is doing, and ailing Iceland has been forced to do. These moves come on top of rescues of Bear Stearns, Fannie Mae and Freddie Mac, A.I.G., ad nauseam. Despite all this liquidity that has been pumped into the system, the stock market hasn't responded (although it has to stage some kind of rally soon; markets never go straight up or straight down.) The Fed has poured $800 billion into financial firms, and that doesn't include the $700 billion bailout package, $200 billion for Fannie and Freddie, etc. Finally, some analysts are stating what may be obvious to the public: perhaps most banks are technically insolvent. The actions by the U.S. government and Fed certainly suggest this. The banks are laden with worthless derivatives they can't dump in this market. Says former San Diego economist Arthur Laffer, "The Federal Reserve's unprecedented decision to buy commercial paper directly from the market confirms the fears of market participants that the banking system faces a chronic capital shortage -- that is, a solvency problem." The credit crisis and the Fed's running of the printing press to ease it will not come without pain: Says William Gross of Newport Beach's PIMCO bond management firm, "Expect a lengthy recession but not depression, accelerating government deficits approaching a trillion dollars...and the eventual rise of inflation" and long-term interest rates.
More like this:
- Federal Reserve Essentially Admits It Is Fighting Depression, Not Simply Recession. It Lowers Interest Rate Target to Lowest Level Ever — Dec. 16, 2008
- More Wall Street Socialism; Insurer AIG Bailed Out by Feds for $85 Billion. Markets Like It. Will Taxpayers? — Sept. 16, 2008
- It's Official: Federal Government Seizes Fannie and Freddie. Will Reform Come Next? — Sept. 7, 2008
- Administration Wants To Bail Out Wall Street Through Massive Subsidy of Fannie Mae, Freddie Mac. But Market Not Buying It — July 14, 2008
- Brace Yourself for Another Bailout: Fannie Mae and Freddie Mac Near the Brink — July 10, 2008