Fed Cuts, Markets Soar, Panic over. Not.
September 19th, 2007So the Fed arrived late at the party with a scything 50bp cut all round. But they left a cloud of uncertainty to block out the ray of sunshine.
Bernanke is not known for his pandering to the markets and inflation is still mentioned as a concern. So this move is part of the restoration of confidence in the US economy and global monetary system. The G7 central bankers and finance ministers will have been wired into each other this past month and since the Northern Rock meltdown probably on 24 hour call.
They all depend on each other now.
How the Asian central banks must be laughing given the dressing down they received during the 1998 crisis and how the G7 bankers and IMF threw the financial risk playbook at them.
So where does all this leave us. Well pretty much in the same place except we know that G7 will underwrite the financial system. This is good for big guys and bad for small ones (or foreigners!). Small guys can fail and be picked up for a song by the big fellas……nice bit of wealth transfer (anyone remember Long Term Capital or Barings?).
But fundamentally there is still pain to come. The fact that asset prices have been inflated way beyond realistic levels means at some point they must retreat and money must be destroyed as the money supply contracts.
No amount of paper shuffling can change that. Pumping out more money will help in the short term to keep institutions from falling over and the system functioning but it cannot prevent the inevitable.
The best we can hope for is a gentle downturn in asset prices. And of course lessons will be learnt….just like in 1794 and every 18 years since 
Tags: bank of england, credit crunch, debt, federal reserve, financial crisis, G7, inflation, interest, markets, money, money supply
September 19th, 2007 at 10:41 pm
What is nice is to come to work in the morning, read an intensly positive and optimistic post like this and spend the rest of the day thinking about the ftility of it all!
Enjoy siesta Raf and have a gazpacho for me
September 20th, 2007 at 6:51 am
It’s hard to be pessimistic when its 27 degrees outside
The real story is that we can solve this continued boom/bust cycle but only if our representatives listen and open up the issue to discussion. It’s a murky area where conspiracy theories run wild.
But although the central banks stonewall we must remember that Parliament is in charge and we decide who is in Parliament.
We can make a change if we get organised.
This is where “open source” government will come into play
more on that later.