Excuse me for being cynical, but the US Fed’s 0.50% cut on the button overnight was nothing but a bail out of Wall Street urgers, dodgy London and European financiers and fat, complacent Australian banks.
Once again the Fed has realised its proper role: if the wider US economy is threatened, then Wall Street is threatened and nothing must be allowed to damage one of the few industries where the US has a definable advantage over the rest of the world, even China with its $US1.4 trillion in reserves.
Just as Alan Greenspan bailed out the Wall Street banks and their mates after the tech booms of the late 90s (remember his “irrational exuberance”) by driving interest rates down to one per cent, Ben Bernanke has moved to ease pressure on a Wall Street beset with problems stemming from the crisis it caused and financed: the subprime mortgage mess and credit markets freeze.
But he had no option. To do nothing would have created an even bigger black hole because, believe it or not, our central bankers are operating in a information vacuum. It’s not me saying that, our Reserve Bank Governor, Glenn Stevens, said it yesterday when he made this remark about the lack of accurate information on where the risks currently lie:
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At the moment, there is widespread suspicion in the absence of clear information. It would be very damaging for that lack of information to lead to a lengthy period of severely reduced credit flow to perfectly good borrowers simply because investors cannot tell who is sound and who is not. More information is needed.
This aside, there is no one to blame for the current problems than the banks and their advisors on Wall Street and in other financial centres.
They are responsible for the problems in financial markets, the erosion of confidence, the problems which have hit banks in Britain, Germany and France and the huge losses for hedge funds and other highly leveraged (and highly paid) fund managers.
The “buck” (to use Harry Truman’s great phrase in all its meanings) started and stops with Wall Street and those people who invented not only subprime mortgages but the way they were sold to punters in the US and elsewhere, and the way they were then parcelled up, turned into Collateralised Debt Obligations and solid off to eager, yield hungry, corner-cutting bankers and investors around the world, including Australia.
And with September 30 — when the banks, hedge funds and all other manner of investors in the US and around the world have to mark these investments to market — approaching, the Fed has made sure there won’t be another slashing of values.
Bernanke has made sure that some of these hard-to-value assets (liabilities really due to the dodgy nature of the underlying assets), have some value that can be pencilled into the books at September 30, thereby sparing us another round of nervousness and credit market problems in October (a really bad month for Wall Street, remember 1929 and 1987) and November.
But this said there is a problem in the wider US economy: the latest foreclosure figures from RealtyTrac, a US company which measures and tallies up foreclosure moves, said overnight that the number of US housing loans and houses in the foreclosure process had doubled in August, compared to August 2006.
US inflation is not as strong as it was two months ago, so there was room for a rate cut. But if you look at the relief shown by the extreme rally on Wall Street: the Dow up by over 330 points, gold up, copper and other commodities linked to economic activity higher and oil up over a record $US82 a barrel — speculators know that a renewed outbreak in inflation is still an option with an attempt to boost the wider economy.
The US dollar fell and rates on 10 year US Government bonds rose because they are sensitive to inflation and traders in these markets know where the dangers from the Fed’s cut lie. But the wider US economy isn’t in negative territory yet, despite the housing and financial markets problems.
The Australian and New Zealand dollars rose strongly as a result because investing here and getting more than 6.5% (7% in the short term market) and 8.25% in New Zealand, is a lot better than 4.75% or 5% in the US.
Reserve Bank Governor, Glenn Stevens, made it clear yesterday, we should not expect a rate cut here. He said the Bank was content to see the higher short term interest rates last longer here. And if they start easing there was a very firm hint that rates could rise.
“Given the macroeconomic situation of the Australian economy thus far, some additional restraint would perhaps not be unwelcome. But just how much such restraint will occur as a result of a market tightening in credit conditions is not yet clear.” That’s Central Banker-ese for “there’s been a rise in short term rates, we don’t know how long it is going to last, but we are thankful because it means we don’t have to consider another rate rise this side of a Federal election”.