Breaking: Fed, ECB, Bank of Canada Prop Up Markets
A: Stimulus: Rinse, Lather & Repeat. That is the Central Bank playbook on dealing with debt deflationary forces after decades of credit expansion and all the wealth that comes with it. With Europe on the brink and bond markets starting to force the issue, we get the stimulating news that global central banks will join forces to 'ease strains on the global financial system'. Equity futures surge on the news.
The experiment of fixing a solvency crisis with liquidity actions continue. Free markets will have to wait as intervention will once again 'kick the can' down the road by not allowing bad bets to get punished and bad debts to either be liquidated or restructured. This happens again and again and again and yet we still face the same issues in the future - when will they get it???
The result will likely be another round of euphoria into risk assets, pumping up most asset classes until the drugs once again wear off and leave markets hung over desperate for more. And then, we will have to deal with the unwinding of that trade. Ben Bernanke even admitted last year that his QE2 actions must be working because 'equity markets were rising'. At the time, QE2 was supposed to stimulate both consumer/business lending + create jobs - they failed at both.
The latest round of actions look to be focused on US Dollar Swaps, as signs of credit stress started to hit eurodollar swaps; discussed on UD last Friday.
Bloomberg reports, "Fed, Five Central Banks Cut Rate on Dollar Swaps":
The Federal Reserve cut the cost of emergency dollar funding for European banks as part of a globally coordinated central-bank response to the continent's sovereign-debt crisis.As usual, the reason provided for such actions will be 'ease strains on the supply of credit to households & businesses'. Bullshit. The reason is to bail out the banks that are up to their arse with exposure to bad sovereign debt. It seems the biggest banks bondholders are no longer risk capital due to the 'interwoven web that we wove' - for fear of systemic risks that may come from some kind of market event. Manipulation of free markets at its finest.
The move is aimed at easing strains in markets and boosting the central banks' capacity to support the global financial system, the statement said. The cost for European banks to fund in dollars rose to the highest levels in three years today as concerns about a possible breakup of the euro area increased after leaders said they'd failed to boost the region's bailout fund as much as planned.
The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies "should market conditions so warrant." Those swap lines were also authorized through Feb. 1, 2013.
"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the statement said.
Meanwhile, Barry Ritholtz discovered who the Top 4 Senate Lobbyists are for 2011 - care to guess what industry it is?? Ding Ding Ding..its the banks:
Bank Spending on Lobbyists 2010 vs *2011The very fact that it was determined by the Global Central Banks that we need another round of co-ordinated actions is disturbing. It explains the fragility of the current situation before equity markets had the chance to react. I think the Fed's mandate has now become 'to prevent major bondholder losses and prop up all risk assets at any cost' - to which they have succeeded!
American Bankers Association
Wells Fargo & Co.
JPMorgan Chase & Co.
Time will tell what the unintended consequences of these actions will be, but I can tell you that with oil already over $100 and gold still holding over $1700, the little guys will continue to get crushed by mis-aligned fed polices.