What's Bernanke Smoking?

The Federal Reserve on Tuesday announced it is ramping up efforts to provide more relief in the spreading credit crisis, saying it will make up to US$200 billion in cash available to cash-strapped financial institutions.
The Fed said it will lend the money to financial institutions for a term of 28 days, rather than overnight. The action is being coordinated with central banks in other countries to try to provide help in a global credit crises that threatens to push the U.S. economy into its first recession since 2001 if it hasn't already.

"Pressures in some of these markets have recently increased again," the Fed said in a statement. "We all continue to work together and will take appropriate steps to address those liquidity pressures." The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank. In addition, the Fed has authorized increases in existing programs called 'swap lines' with the European Central Bank and the Swiss National Bank. "These arrangements will now provide dollars in amounts of up to US$30 billion and US$6 billion to the ECB and the SNB respectively," the Fed said, extending the term of these swap lines through Sept. 30.

The new lending initiative "is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally," the Fed said. Its announcement said that securities will be made available through an auction process on a weekly basis beginning March 27. The new program, called the Term Securities Lending Facility (TSLF), is geared to provide primary dealers -- big investment firms that trade directly with the Fed -- with short-term loans. They would pledge other securities -- including federal agency debt, federal agency residential-mortgage-backed securities -- as collateral for the loans. The loans would be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008.

The Fed since December has been making short-term loans available to banks through a new auction facility. It has provided US$160 billion available to squeezed banks in hopes it will help them to continue lending to individuals and companies.

The Fed has been working to pump billions of dollars into the banking system to aid an economy rocked by the subprime mortgage crisis and the severe tightening of credit.

A meltdown in the housing and credit markets has made banks and other financial institutions reluctant to lend to each other, causing a cash crunch. Financial companies wracked up multibillion-dollar losses as investments in mortgage-backed securities soured with the housing market's bust. Problems first started in the market for subprime mortgages-- those made to people with blemished credit histories. However, troubles have spread to other areas.

The picture worsened just after the Fed's announcement Friday, when the Labor Department released a report showing employers slashed another 63,000 jobs in February, the most in five years.


a) US$160bn not enough, now US$200bn. Why is Bernanke doing this? It appears he is beholden to the big banks, when his real priority is a ensuring growth with minimal inflation. If it was Paul Volcker, he would have asked the banks to f.o.

b) It also appears that Bernanke is very keen NOT to let the stock indices fall further. When did that became the Fed's priority? Does the entire Federal Reserve board have a lot of stocks? Even if they do, its not their business to save the stock players.

c) If the motive is to save ailing banks and mortgage businesses from folding - is it really in the interest of a well run economy NOT to allow them to fail? This is reminiscent of Japan's credit implosion in early 90s, where nothing moved, nobody called on each other's debts. Till today, the economy is still working off the excesses, more than 15 years of stupidity.

d) When there are bubble, the market will self-correct, and they need to correct. The Fed should step in to facilitate an orderly correction, not manipulate or delay or stave off the needed correction. Not allowing things to correct will ensure problem credit still being pervasive within the system, and actually pumping liquidity will ensure the bubble is being reflated and will rear its ugly head again soon.

e) Its also ethically wrong not to punish the banks who made the mistakes, or rather allow the banks to be punished by the markets. Banks lend aggressively and recklessly, and they pocket the fees and trading profits. Due to the recklessness the markets imploded, now they come running to the Fed to rescue them from the mess. Where is the logic and sensibility? This also presents an unfair treatment of investment pros who shorted or betted that the credit implosion would come about - they deserve their gains for being right, what kind of casino is this - red the banks win, black the banks don't really lose??!!

p/s the photo is the underbelly of a unique stingray


pureland said…
Mr Dali

What say U ? Market sentiment U turn and KLCI looking pretty good.

A time to ' re-rate ' your target to enter or still sideline waiting for subprime bubble full blown out ?

Care to give some advise.
pureland said…
Mr Dali

Since USD is running a huge massive budget deficit, I cannot understand how FED can able to create USD200 b for the market ?

Does this mean this USD200 b is actually paper money that they are busying printing now ?

If this is their action to ease liquidity, I believe in longer term they are inviting even greater trouble. Instead of detox the current problem, they are pumping in more toxin into the system.

What say U ?
lim said…
Hi Brada,

Don't be so angry. That's the "rule of american games". US is in control of the world finance, world organisation (like IMF, world bank, WTO etc), World strongest military force, world political influence... etc... you name it.

As professional "ant" investor, we should factor in the US political influence to Federal Reserve. Ah Bush Jr may not want to be a recession president like his father. Do you want a legacy as "twin recession president" of United States of America exclusively from Bush family?

Moreover, Ah Ben also want his job after Ah Bush retired.. He must show some loyalty and the most important I-fight-for-you kind of attitude to his current boss, so as to impress the next resident of white house. After all, Ah Green has exhibitd a good example for the past 20 years... Go see see the lowest Federal fund rate happened in 2004, a election year. Another example Ah Paul, the renowned inflation fighter of Federal reserve, not appointed by ah gan, the "star war" republican president. The reason, ah paul implemented a politically unwelcomed policy of high Federal fund rate.

Compare: 1998 Asia finacial crisis vs 2008 US sub-prime and credit squeezed crisis

A lot of people(IMF, World Bank, Big Big Fund Manager, Big Big Speculator) reprimended Asian country for their crisis contingency plan...

US now - reduce interest
Asian then (US and the dog of US, like IMF recommended ) - Increase interest

US now - actively intervene
Asian then (US recommended or force you to accept) - pressure the government / centre bank not to intervene, must be free market.

Us now - cannot buy their valuable strategic asset,like habour, controlling stake in bank, oil company, telco, he he only sell you poisonous sub-prime.
Asia Then- should open up market, force you to sell every valuable thing.

If today Us is right, then US dog(IMF)recommended action plan for asia countries to sailed thru the crisis is wrong lah? I puzzle. If today US Ah Ben plan is wrong, then why implement it to cure US crisis now?

Ah Dali, no need to comment to them lah..let think how to make profit out of it and teach our next generation to be more intellegent to deal the world financial game, as at today, still the US people the one who set the game rule.

The right thing US and Asia do
US now- Devaluate currecy to increase export, to boost up GDP.
Asian then - same

The day after tomorrow (Short term it mean, next few mnths)
Will the mess over soon?

My view: the worst of stock market may be in April-May( as up to today analysis), during the first quarter economic data and corporate earning released... must be from US lah... Malaysia follow sahja. The worst of econ data and corporate earning is more or less confirm by Ah Buffett comment on CNBC the retailing arm he owned shown bad or slowing down figure denoted the groomy retail spending and US domestic consumption. And Ah Ben Injested fresh liquidity of USD200Billion further confirmed the real mess of first qtr econ data.

If the mess really too big, it may prolong for another 6 months. All depeand on the coming data liao.

What make the recession prolong... as you say loh, credit card debt (need close watch n it and its related data) and the hedge fund melting (all the terrible over 97% speculative derivatives, the 3% Derivatives for hedging is ok lah)

The day after this year.
Federal reserve inject liquidity like this will re-inflate the aset again. See you the next bigger crisis and bigger bubble.

The day after
see you brada.

Thanks for your feedback on Ah seng chat forum. He must have make few buck for holding long future overnight.


Ah hing
rask3 said…

Lim or Ah Hing has made good points. My view is that all the speculative activities tied to housing, equities, bonds and commodities and currencies and derivatives will come home to roost, sooner or later. And since banks are financing the speculators, the real economy will have to pay the price, unless some drastic measures are taken.

I say to hell with speculators. How can they be allowed to go scot free? And as Dali put it, the casino they are playing in seems to have funny and unfair rules. Red I win, Black I dont lose, lol.


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