Sometimes a simple statement of the obvious is what we need to hear:
“If we can’t get confidence back in the credit markets, I don’t see how equity markets move that much higher,” says David Twibell, president of wealth management for Colorado Capital Bank.
Indeed. Yesterday, Australia’s central bank cut it’s prime interest rate a full point which helped Asian markets rally a bit, but then bad news regarding British banks led to further declines in European stocks. Meanwhile the US Federal Reserve is talking about the unprecedented step of buying up massive amounts of short term commercial debt in order to fund business credit lines which are imperiled by the current financial crisis in the hopes that will will start the money flowing again.
The Federal Reserve is working with the Treasury Department on the plan to buy “commercial paper,” a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls, according to a person with knowledge of the plan. The person spoke on condition of anonymity because the plan is still being put together.
The market for this crucial financing, which relies on investors rather than banks, has virtually dried up. That has made it increasingly difficult and expensive for companies to raise money to fund their operations. Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.
The unstable situation has left many companies vulnerable. The notion under the plan is for the government to come up with a backstop that would provide companies with a new place to get cash. […]
To help ease credit stresses, the Fed announced Monday it will provide as much as $900 billion in cash loans to squeezed banks. It said 28-day and 84-day cash loans being made available to banks will be boosted to $150 billion apiece. Those increases will eventually bring the amounts outstanding under the program to $600 billion.
Loans that will be made available in November to banks also will be increased to $150 billion each. That makes a total of $900 billion in credit potentially outstanding over year-end, the Fed said.
The Fed also said it will begin paying interest on commercial banks’ reserves, another way to expand the central bank’s resources to battle the credit crisis.
You know what this is called, my friends? It’s called socialism, though it is socialism for the “free market” and not for the eponymous “Joe Six Pack” and “Hockey Moms” to which Sarah Palin has made such constant reference in her speeches. In short, the Fed and the Treasury are preparing to become the Banker of last resort for business, since all of our privately owned financial institutions have decided not to lend their precious cash anymore.
It seems that the free market, in its infinite wisdom, has panicked big time, and has decided to bring the economy crashing to a halt. Investors big and small are running to buy T-Bills and abandoning commercial paper and other corporate debt instruments. This has the strange effect of strengthening the dollar even as your local employers can’t find the credit they need to fund their operations, meet payrolls, etc. And if this continues, sooner rather than later, businesses will start to fail, no one will be placing orders for new goods and services, and (this is the relevant part for you and me) workers will be laid off.
So you can see why the geniuses at the Federal Reserve and the Treasury, diehard Republican free marketeers though they may be, have decided on another “Hail Mary” pass of government intervention in the financial markets. Desperate times and desperate measures as the saying goes. In normal times they would scoff at the idea of worshiping at the altar of a”Big Guvmint” (and its two demonic liberal Saint Johns: John Maynard Keynes and John Kenneth Galbraith).
But I guess the world really has turned upside down, because these stalwart men of business who chugged down the intellectual breast milk of Milton Friedman and Ayn Rand, revered figures of “freedom” who never saw a regulation they didn’t want to strangle until it lay dead in its crib, are now turning to massive government intervention in the financial markets as our only hope of salvation. Who knew they would turn to the Satan of discredited “liberal economics” so quickly? Where is their faith in the invisible hand of self interest and rationality now? Oh ye of little faith.
I suppose the wisdom of crowds isn’t all its cracked up to be, now is it? Because, despite all the assumptions conventional economic theory makes that people will act rationally out of self interest, and that “greed is good,” the truth is that markets left to their own devices ride the emotional roller coaster of your typical person suffering from bipolar disorder. That’s why the major economic powers of the world regulated business and financial markets after the Great Deporession, to insure such an event would never happen again. And it worked pretty well, until the free marketeers took over the world and devoted themselves to tearing down those regulatory walls in the name of “free trade” and “globalization” which was supposed it lead to a paradise on earth (or at least ever increasing wealth and higher standards of living for all). Too bad it was just another utopian dream that, like all misguided attempts to create a utopia, relied upon faith and dogma rather than cold, hard facts and evidence to support the delusions of grandeur of the utopian visionaries.
Unlike most utopian dreamers, however, whose influence is usually limited to the few brainwashed souls who buy into of their ideological fantasies, the mistakes the acolytes of Friedman and Rand made (paging Alan Greenspan) will be harming us, and our children and grandchildren, for generations to come.
