The US Federal Reserve has just orchestrated a $200bn money market cash boost. David Stevenson doesn't like it...
What do I think about the latest Fed (US Federal Reserve) $200bn scheme to bail out the planet?
Warning: no punches are about to be pulled here.
The sight of central banks pumping grillions of greenbacks, pounds, euros or indeed any other currency into money markets at the moment is, for me, economic lunacy.
Commercial banks have already made complete fools (small ‘f') of themselves by punting around in putrid piles of dodgy debt instruments, and by advancing very large loans to loads of high risk borrowers whose capacity for repayment of even the majority of the amounts lent was, at best, highly questionable.
And of course if something were to go wrong, the prospect of repayment was likely to be seriously imperilled.
Well, that's the hedge funds dealt with...but as for all those subprime mortgage advances, words completely fail.
The whole artificial boom was created by Fed chairman Ben Bernanke's predecessor Alan Greenspan, whose ultra-low US interest rate policy between 2001 and 2004 was instrumental in inflating the biggest credit bubble in world history.
So what does Mr B do when the inevitable bust follows?
Answer: try to keep the party going. Or, as ex-Citigroup head honcho Chuck Prince infamously described, maintain the music playing so that people have "got to get up and dance".
The Fed's methodology?
Join forces with other central banks in injecting $200bn into the system by letting financial institutions exchange mortgage-backed securities for Treasury bonds, and taking "appropriate steps to address liquidity pressures".
Who's in the cosy club? The Bank of Canada, the Swiss National Bank, the Bank of England and the European Central Bank.
I've got to admit that the policy is sort of consistent. Since December the Fed has been extending credit to banks through a new method called the Term Auction Facility.
This may have helped to ease interbank rates for a while, but credit markets have continued to feel the pinch, despite the Fed fast-tracking the slashing of official interest rates since September by 2.25% to 3%. And traders are still factoring in the chance of another 0.75% cut at the 18 March meeting at 60%.
To qualify for the Fed's offer, banks will almost certainly have to book some bond losses.
Yet doling out ever more cash to a bunch of financial illiterates (and I'm talking the lenders here, not their customers - the bankers should have known better) makes about as much sense as popping open the champagne corks and handing round full whisky bottles at an Alcoholics Anonymous convention.
If history is any guide, an army of trigger-happy traders will now start punting around in as many esoteric, exotic derivative deals as they can lay their hands on. A recipe for more trouble.
And by failing to encourage banks to ‘mark-to-market', i.e. to value their polluted loan portfolios at anything like a realistic level, the Fed plan just puts off the Day of judgment.
No proper ‘clearing' prices will be established, even for some of the simpler financial toys with which dealers have been playing.
So what about some of the more arcane products like CPDOs (constant proportion debt obligations), which are ‘synthetic' CDOs (collateralised debt obligations) consisting of packages of CDS (credit default swaps - effectively insurance against default)...well, you're probably getting the picture by now.
Because have no doubt, for the giant hedge fund into which the United States has morphed, that cathartic day is on the way.
PS. As flagged by The Fool on Monday, Carlyle Group's mortgage bond fund has now blown up. Failure to reach agreement with lenders means that the assets are now being flogged off to the highest bidder. On the news, the dollar hit a 12-year-low against the Japanese yen.
