We are seeing a loss of confidence in the American economy.
by http://www.wvwnews.net/story.php?id=2342
I do not have a new message here; we have known for a long time that advance preparation and a strong balance sheet are the keys to riding out a financial storm. As I have emphasized before, the Federal Reserve can deal with liquidity pressures but cannot deal with solvency issues.
~ William Poole, President,
Federal Reserve Bank of St. Louis (February 29, 2008)
The Federal Reserve System announced a new program on March 11. The announcement was not quite gibberish, but it was close. This much was clear: it is a $200 billion program.
The http://www.wvwnews.net/story.php?id=3291 bulls thought, “Wow! That’s huge! That will solve the problem!” They did not read the details of the proposal.
The announcement was an implicit admission of a looming credit crisis of monumental proportions: an unprecedented write-down of http://www.wvwnews.net/story.php?id=3177 assets. Why? Because these assets, rated AAA by the big three ratings agencies, are nowhere near AAA. Banks are facing new rules on financial reporting: mark to market, meaning the end of the book value (face value) game that they have played for decades. This is the Financial Accounting Standards Board Rule 157. It goes into effect for banks this quarter, which ends on March 31. Bankers are going to have to report the truth or else face criminal penalties. Why, they even might turn into Eliot Spitzer! That’s what happens when you play fun and games, as accountants have been allowed to do.
The solution? Sell these promises to pay at market prices. This would have included the promises to pay issued by Fannie Mae and Freddie Mac, the two mortgage-investing companies that account for 40% of the American mortgage market, and which have accounted for at least 70% of new mortgages written over the last six months.
That solution would have brought economic reality to the investment world’s attention: the AAA ratings have been overly optimistic.
The FED rushed to the rescue. It offered to auction off U.S. Treasury debt in its portfolio, which is always AAA-rated, in exchange for AAA-rated private debt. This will allow banks to transfer to the FED questionable assets in exchange for assets that cannot be downgraded in today’s markets: Treasury debt.
The FASB’s Rule 157 does not apply to the FED. It will not have to report a capital loss.
This program was seen by mutual fund managers as an increase in liquidity. It was in fact a last-minute desperation move by the FED to stop a free-fall in the credit markets and possibly even a lock-up of the banking system. If that is the meaning “increased liquidity,” fine. But this was not how the FED or anyone in the media explained the new program. For my explanation, click here.
The FED timed its announcement of this proposed “temporary” $200 billion asset swap just in time for the opening bell of the New York Stock Exchange on March 11. Sure enough, the Dow soared 416 points that day. The next day, it fell by 46 points, after having climbed early in the morning by 150 points.
We have learned that a FED press release can goose the stock market for one day. Then the market sinks.
Stock market optimists who have lost money all year want to believe that the FED can achieve the following with a new program:
1. Overcome the liquidity crisis
2. Overcome the solvency crisis
3. Overcome sinking residential real estate markets
4. Avoid the imminent fall in the commercial real estate markets
5. Restore bankers’ confidence in other bankers
6. Restore confidence in the credit rating services’ credit rating services
7. Reverse the dollar’s slide
8. Reverse the falling stock market
If the FED could do any of this, don’t you think it would have done so by now?
http://www.lewrockwell.com/north/north613.html