The Fed last week introduced another scheme called “Term Securities Lending Facility,” which allows it to lend to securities dealers on top of funds already injected in the system. I am losing count, but it appears to be the third attempt in the last few months to get a handle on the credit crises.
Bill Fleckenstein reflects on this latest attempt and while it is doomed to fail in his latest article. Here are some highlights:
I guess the sight of all those suffering hedge funds and brokers was just too much to bear.
Now, I realize the Fed was created to provide a liquidity backstop in times of emergency. But the Fed has abused its privilege for so long — by being the creator and proponent of excess liquidity and the problems it causes — that, in my book, the Fed is nothing short of an abomination. The reality that’s eluded Fed “experts” is simple: Credits in much of the financial system are simply no good. And creating liquidity and stalling for time won’t make those credits good.
I find it stunning that the Fed is willing to open up its tool kit when faced with liquidity problems — spawned from bubbles of its own making — and yet while those bubbles were inflating, the Fed kept it snapped shut tight.
This action by the Fed will temporarily alleviate some pressure, but it will not change the fundamental problem: Home prices were in a bubble that has now burst. People making median salaries in this country can’t afford to buy houses. And even folks who make more money often own more house than they can afford.
The Fed’s move set off a big rally on Wall Street, but it lasted just one day. This problem is going to run its course. There’s no bubble to bail out the housing bubble.
As to the folks who think commodities may be the next bubble: They might be right.
But exploding commodity prices will not help. They’re not going to make housing more affordable because less of people’s paychecks will be available for mortgage payments.
Before its implementation, the chance of the Fed buying a piece of paper that could deteriorate rapidly over the course of a couple of repo terms would have been small. But now that the Fed, through this facility, is willing to accept (exchange for Treasurys, actually) “AAA-rated” paper — and remember that the rating agencies are suspect — it’s not inconceivable that the following could occur:
The Fed might actually start taking paper at one price and then find out (by the time XYZ financial institution is supposed to take it back) that the paper is trading at a different price. Inquiring minds would like to know what the Fed would do about these losses if the repo’ing entity was determined not to take back the collateral.
Creating liquidity and stalling for time won’t make those credits good. Credit is contracting all across the financial system, in America as well as around the globe. At the same time, credits are going bad. Both of these problems keep lapping up against each other, and their magnitude will render bailouts useless.
Despite that glaring reality, the Fed remains intent on monetizing whatever needs to be monetized, as Chairman Ben Bernanke thinks this can prevent the underlying mass of home-price issues and the economic consequences of the burst housing bubble from doing what they will do.
But in the end, he’s going to shred the currency market and at some point the Treasury market. And, though Greenspan deserves all the blame, Bernanke will likely get it — with history erroneously declaring him to be the worst Fed chairman ever.
While the Fed’s attempt may postpone the inevitable, I agree with Bill that it will not solve the underlying problem that we’re in a housing/credit bubble that has burst and that bad debt is permeating through the entire financial system. No amount of Fed or government intervention will help companies survive long term if the bad debt issue is not addressed sooner rather than later.