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The Fed buys the market

Robert Peston | 09:20 UK time, Wednesday, 12 March 2008

The global financial economy looks increasingly like an over-pumped old tyre, on to which the central banks are desperately trying to apply patches.

But just when they’ve mended one puncture, there’s that unmistakable hissing sound again.

fed_203getty.jpgThe latest crisis, as I mentioned on Friday, is the collapse of investors’ confidence in regular US residential mortgages.

With delinquency rates rising and the severity of the US slowdown impossible to predict with confidence, no-one wants exposure to Mr and Mrs Average of AnyTown, America.

Except, that is, for the Federal Reserve, the US central bank.

It did this remarkable thing yesterday by announcing that it would swap $200bn of US Treasuries – supposedly the best credit in the world – for mortgage debt.

This offer is only available to primary dealers, the securities firms with which it deals directly.

But these are America’s major banks, so in theory it delivers succour to an important part of the system.

There are two possible ways in which the mortgages-for-Treasuries exchange should help.

It would provide direct succour to any bank suffering a funding crisis from its own holdings of illiquid mortgage assets.

And it could – but I stress this is hypothetical – restore a bit of confidence to banks so that they lend to other institutions, such as hedge funds or structured finance vehicles, that are on the brink of insolvency as a result of their own exposure to mortgages.

It’s a bit of clever financial engineering by the Fed, in that – unlike many of its other money-market initiatives of the past few months – it does represent net additional credit for the financial system.

But it’s high-stakes stuff.

It shows that the Fed believes that capitalism has entered one of its more dysfunctional phases, when foolish lenders have to be protected from the consequences of their own folly.

We’re in the mess we’re in because financial institutions en masse lent far too much to the wrong people and businesses over the preceding few years.

But, the Fed feels, they can’t be allowed to suffer the full consequences of their stupidity, for fear of the damage wreaked on the US economy in particular and the global economy by extension.

In other words, the Fed is now wholly committed to a full-scale rescue of the financial system.

Its latest initiative may not work, but that’s not the point.

What is relevant is that it has signalled that it will do whatever it takes to minimise the pain for banks, insurers, hedge funds and so on.

It’s coming pretty close to making a commitment to buy up all and any financial market that runs into difficulties, almost to nationalising capitalism.

And that’s why stock markets rose across the world, because of the intent signalled by the Fed rather than because of confidence that it will succeed with this latest gambit.

That said, the next possible crisis in this wave of crises may be particularly intractable.

For the past few weeks, strains have been worsening in the market for credit default swaps – that multi-trillion dollar market in debt insurance.

The price of that insurance has been going through the roof.

There is some cost to the companies whose debt is insured, but they are almost an irrelevance in this market.

The real significance of credit default swaps is that they are instruments for speculating on the fortunes of companies by hedge funds, banks and other financial institutions.

They represent one of the most disturbing manifestations of the debt bubble, in that trading in them has been massive and opaque.

If they were to become impossible to trade or value, the damage to many financial institutions would be immense.

And in those circumstances, it’s really difficult to see quite what the Fed could do.

Would it begin to take credit default swaps as collateral for high quality US government debt?

That really would be to swap exchange ordure for gold.

But let’s keep our fingers crossed and hope that it never comes to that – and that the Fed’s evasive action sees us through this crisis in reasonable shape.

Would that mean we had got off scot-free?

No.

When the Fed bails out the system in the way it has done, it sends a powerful signal to the players that they are too big and important to fail.

That gives them all the confidence they’ll need to make new and even more stupid lending mistakes when the economy returns to its next benign phase.

So at some point, the US authorities will presumably have to ask themselves searching questions about the nature of the capitalism they hold dear.

Do they really feel comfortable with a market system in which modest folly is punished but an outbreak of grand delusion is excused?

Comments   Post your comment

  • 1.
  • At 10:27 AM on 12 Mar 2008,
  • help me out here wrote:

following this saga with keen interest. But really struggling to understand the credit default swap aspect. Anybody insiders care to explain that for the lay audience?

  • 2.
  • At 10:32 AM on 12 Mar 2008,
  • Andy Cooper wrote:

The Feds actions are an acknowledgement as to how bloated the markets became, or were allowed to become more like, & How bad the coming Recession could be!!..
Both the U.S & U.K economies simply have to deflate to a more sustainable level, throwing huge amounts of cash at the problem like this may keep the party going a little longer but in no way will it address the real issue, In essance people borrowed beyond there means..

The capitalist system that the ruling class cherish is not just in a ‘dysfunctional phase’, it is a systemic failure of global capitalism. For the last 30 years, capitalism has had a free reign in Britain with the Tories and New Labour carrying out their ultra free-market policies. We were told that the private sector knew how to best run the economy, that nationalised property was ‘inefficient’, and that through competition prices would decrease and the living standards of ordinary people would increase as a result.

We now live in a society more polarised than ever, with the super-rich enjoying a lifestyle beyond our wildest dreams, creaming off massive profits at the expense of the working class and the poor. Meanwhile, most ordinary people struggle to hold down a job, pay the bills and find a permanent place to live.

New Labour tried so hard to hold off the nationalisation of Northern Rock because it puts the concept of nationalisation back on the table and is an admittance of the failure of the capitalist free-market system to work without state intervention. If the government can bail out a private bank to the tune of billions of billions of pounds, why can’t they fully fund public services, the NHS, free education? It is because New Labour are a party of capitalism and what we need now is a new party of the working class to fight for fully funded public services, better wages, full trade union rights and a planned, socialist economy under workers’ control. The blind nature of the capitalist system is destroying the environment and driving down the masses into grinding poverty. It is now time to say enough is enough. Join the Campaign for a New Workers’ Party at http://www.cnwp.org.uk

  • 4.
  • At 10:34 AM on 12 Mar 2008,
  • john thomas wrote:

Just as with HMG and NR so too the Fed... throw money at the problem and hope it sorts it....inflate the future risk of moral hazard and while NOT actually sorting the problem, while ACTUALLY wasting billions, the mess just gets worse and worse... while at the sametime the markets rise and traders and banks... the very GITS who created this mess... MAKE MORE obscene amounts of MONEY.

We are ruled by idiots and incompetents who compound their failings by maintaining the greed and standing of those, who by their own actions, deserve only ruin and ridicule.

It can't come soon enough...Viva la revolution!

  • 5.
  • At 10:37 AM on 12 Mar 2008,
  • Gary (London) wrote:

Why is it that with every day that passes putting one's savings under the mattress seems the surest way of financial security? That the capitalist system seems to have hit the heights of hubris seems inarguable now - the question is Robert, how does one legislate to ensure in that next benign phase this does not happen again?

  • 6.
  • At 10:38 AM on 12 Mar 2008,
  • adam wrote:

Ask not what you can do for your country, but what your country can do to you. Every step seems to confirm the thesis that we will see a depression not a recession. The fed appears to be desperate. Alan Greenspan’s book mentioned that the LTCM debacle almost shut down financial markets. This debacle clearly dwarfs LTCM. Its impacts will be devestating. Run don’t walk from the dollar. It dosn’t matter what you run to, it will be better than the dollar. Truth be told even outside of the credit markets we had issues. But we have been feed a farce for so long, that we are blind in the darkness of political deceit. Get ready for a leg down in the market that may be worst than the tech buble bursting. It will happen withing the next 6 months.

  • 7.
  • At 10:45 AM on 12 Mar 2008,
  • Geoff Berry wrote:

Robert,

One day the Federal Reserve, like the UK taxpayers, will want their money back.

This is not even the beginning of the end of the global crisis.

  • 8.
  • At 10:46 AM on 12 Mar 2008,
  • Stephen Dobbs wrote:

The capitalist system that the ruling class cherish is not just in a ‘dysfunctional phase’, it is a systemic failure of global capitalism. For the last 30 years, capitalism has had a free reign in Britain with the Tories and New Labour carrying out their ultra free-market policies. We were told that the private sector knew how to best run the economy, that nationalised property was ‘inefficient’, and that through competition prices would decrease and the living standards of ordinary people would increase as a result.

We now live in a society more polarised than ever, with the super-rich enjoying a lifestyle beyond our wildest dreams, creaming off massive profits at the expense of the working class and the poor. Meanwhile, most ordinary people struggle to hold down a job, pay the bills and find a permanent place to live.

New Labour tried so hard to hold off the nationalisation of Northern Rock because it puts the concept of nationalisation back on the table and is an admittance of the failure of the capitalist free-market system to work without state intervention. If the government can bail out a private bank to the tune of billions of billions of pounds, why can’t they fully fund public services, the NHS, free education? It is because New Labour are a party of capitalism and what we need now is a new party of the working class to fight for fully funded public services, better wages, full trade union rights and a planned, socialist economy under workers’ control. The blind nature of the capitalist system is destroying the environment and driving down the masses into grinding poverty. It is now time to say enough is enough. Join the Campaign for a New Workers’ Party http://www.cnwp.org.uk

For the last 30 years, capitalism has had a free reign in Britain with the Tories and New Labour carrying out their ultra free-market policies. We were told that the private sector knew how to best run the economy, that nationalised property was ‘inefficient’, and that through competition prices would decrease and the living standards of ordinary people would increase as a result. We now live in a society more polarised than ever, with the super-rich enjoying a lifestyle beyond our wildest dreams, creaming off massive profits at the expense of the working class and the poor. Meanwhile, most ordinary people struggle to hold down a job, pay the bills and find a permanent place to live. New Labour tried so hard to hold off the nationalisation of Northern Rock because it puts the concept of nationalisation back on the table and is an admittance of the failure of the capitalist free-market system to work without state intervention. If the government can bail out a private bank to the tune of billions of billions of pounds, why can’t they fully fund public services, the NHS, free education? It is because New Labour are a party of capitalism and what we need now is a new party of the working class to fight for fully funded public services, better wages, full trade union rights and a planned, socialist economy under workers’ control. The blind nature of the capitalist system is destroying the environment and driving down the masses into grinding poverty. It is now time to say enough is enough. Join the Campaign for a New Workers’ Party http://www.cnwp.org.uk

  • 10.
  • At 10:49 AM on 12 Mar 2008,
  • Gary (London) wrote:

Why is it that with every day that passes putting one's savings under the mattress seems the surest way of financial security? That the capitalist system seems to have hit the heights of hubris seems inarguable now - the question is Robert, how does one legislate to ensure in that next benign phase this does not happen again?

  • 11.
  • At 10:52 AM on 12 Mar 2008,
  • John Constable wrote:

Moral hazard does not appear to exist in the curent banking system.

I think that this latest move by the Fed will fail because this financial tsunami is just too big.

After the reckoning, there will have to be a reassessment, which must result in a clear delineation of what financial instruments are regulated and to some extent protected and what is outside ... and at the risk of the owner of the instrument.

The two must be completely separated so that financial instruments within the regulated environment are never bought down by unregulated activities.

  • 12.
  • At 11:04 AM on 12 Mar 2008,
  • Geoff Berry wrote:

Robert,

One day the Federal Reserve, like the UK taxpayers, will want their money back.

This is not even the beginning of the end of the global crisis.

  • 13.
  • At 11:04 AM on 12 Mar 2008,
  • kamal wrote:

you are witnessing the collapse of the capitalist system. A system that is now trying to rescue the culprits. If you had a business and you needed liquidity, no one will help you. Now that banks, major creators of this, are in trouble, they get all the help they need.
the ONLY way this mess will be corrected is when banks and other so-called experts are left to their own devices in a supposedly free-economy.
If that happens, those who made the mistakes will pay for them. It may cause general financial crises but that is totally unavoidable now. The signs were there for many years now. The Fed and co can keep pumping more cash into the economy for as long as they want. This will have nothing but a short-term positive effect and if you start noticing prices of everything going up sharply, you will know that the system is awash with money in the form of bank notes and that their value is going down.
The fundementals dictate where this is heading: Even if the Fed and other central banks reduce interest rates to 0, print day and night, there will be plenty of casualties, plenty of people losing their homes, plenty of people losing their jobs.
When all the dust settles in a few years time, people should not forget that bankers created all this. Printing money with no gold equivalent is inflationary and simply drives prices up and reduces the value of the money you currently have. So-called regulators and credit-rating agencies that turned a blind-eye to all this and those who were paid by the companies/banks they are supposed to rate, must themselves be regulated. Tax-payers who ultimately pay the price, will have to learn to say no.
The people who bought into the hype and speculation trends must learn that by doing that they only made life miserable for others and they themselves have to pay back for years to come what they bought with inflated money.

  • 14.
  • At 11:14 AM on 12 Mar 2008,
  • Salmondwinsagain wrote:

Thank God the Americans CAN act - this lot here are hog tied because of Browns Chancellorship - it was terrible - just like his current role.

Of course the action taken by the FED will not cure all the worlds ills but at least they ACT.

  • 15.
  • At 11:16 AM on 12 Mar 2008,
  • barrie c. wrote:

We need to keep figures in perspective. $200bn of housing debt accepted as collateral translates into about £100bn or about the equivalent of the total taxpayer exposure to Northern Rock. So the sum in global terms is not huge but the most threatening aspect of it is the message it sends. Robert Peston is surely correct in saying "When the Fed bails out the system in the way it has done, it sends a powerful signal to the players that they are too big and important to fail.

That gives them all the confidence they’ll need to make new and even more stupid lending mistakes when the economy returns to its next benign phase."

  • 16.
  • At 11:34 AM on 12 Mar 2008,
  • Down at heart wrote:

I have no problem with being responsible for my own investments/retirement income, assessing the risk/reward position, cost, leverage and so on.

But it makes me sick to think that the finance industry may not have to pay the price that the rest of us mere mortals do when we've overextended or made some bad choices. The moral hazard of the Fed not letting banks face the consequences bodes ill for the future.

  • 17.
  • At 11:37 AM on 12 Mar 2008,
  • RISHABH wrote:

THE TRUTH OF THE MATTER IS THAT THERE'S NOTHING BETTER THE FED COULD HAVE DONE TO SALVAGE SOME PRIDE. MR PRESIDENT HAS ALREADY BLOWN UP THE TAX PAYERS POCKETS IN HIS TRYST WITH IRAQ & NOW WITH THE ECONOMY IN DIRE STRAITS HE IS TRYING TO WIN SOME CHEERS FROM THE PUBLIC BY THROWING IN A FEW BUCKS.

FIRST THERE WERE AGGRESSIVE RATE HIKES , THEN AN AGGRESSIVE WAR & NOW SOME AGGRESSIVE CUTS & SOME TO FOLLOW. THIS AGGRESSION HAS RATTLED THE ECONOMY & ITS GOING TO TAKE SOME DOING TO GET OUT OF IT.

BRING OBAMA ON SAM & RESCUE THE COUNTRY YOU WERE BORN IN.

  • 18.
  • At 11:46 AM on 12 Mar 2008,
  • Philip wrote:

The phrase 'nationalising capitalism' is the best description yet of the distortions rampant in the capital markets - we are witnessing a period in financial history where profits are privately owned but losses become public property. This state of affairs is a disgrace and will have ramifications for years to come, not least regarding inflation, where once again we all have to pay.

Clearly this is a similar scenario (in terms of intention) to the BOE and NR.

It is surely getting to the stage where governments need to decide whether we have a free market system or not. I read an excellent book (Investing without fear) which points out hypothetical situations very similar to what is happening now. Eventually the government bond auctions suffer because investors no longer feel safe lending to the government. The government then cannot raise any new funds. (Apparently we came close to something very similar in the early 80s under Paul Volcker).

Investors boycott government auctions because the thinking goes along the lines that they are just going to squander it on bailing out failing and failed businesses. If I am not willing to lend to these business why should I lend to the government that is only going to transfer the funds to these organisations.

Could this be the beginning of the end?

  • 20.
  • At 12:02 PM on 12 Mar 2008,
  • Alex wrote:

It's like the old joke,

If you owe a thousand pounds, it's your problem. If you owe a million pounds, it's your bank's problem. But if you owe a trillion pounds, now it's your governments problem.

  • 21.
  • At 12:02 PM on 12 Mar 2008,
  • Hassan Suffyan wrote:

Excellent article Robert. The trading activity in CDS far surpasses that in CDO's and MBS/ABS. Since none of these so called 'securities' trade on an exchange, they have been open to very liberal valuations and are very speculative in nature. Banks have even created derivatives out of derivaties!! Imagine a pyramid scheme, feeding into another pyramid scheme and you'll get the picture. The CDO market collapse is just the tip of the iceberg, this is big and the Fed knows it. It can try and pump as much liquidity into the markets as it likes (from its waning economy), but the problem isn't liquidity, its confidence. The money is there, but the problem is that everyone is holding onto it. Big names, like Citigroup, UBS, RBS need to step up, bite the bullet and value the mortgage-linked securities to zero and then evaluate their assets from scratch. It will be painful in the short term, but it will remove the ambiguity from the market and normality can resume.

  • 22.
  • At 12:05 PM on 12 Mar 2008,
  • Andrew H wrote:

Its not just limited to banks and central banks. There have been suggestions that individuals shouldn't be taken under by this either - the idea that no-one should lose their house over this.

I applaud the sentiment behind that, but what about those who have exercised restraint? What about those who have realised that its madness that a three bed terrace within the M25 costs over £300k, and refuse to be part of the madness? Does their restraint mean they still walk away empty handed because they were unwilling to take the made risk which turned out to be genius as the government bails the idiots out?

Hows about those lumbered with student loans in the era of 125% mortgages for whom now getting a house will be nigh on impossible until their student debt is eradicated?

Someone here has dropped a very big ball, and forced permanent change on the country on the basis of telling us that a temporary blip is permanent. And thats not on.

  • 23.
  • At 12:06 PM on 12 Mar 2008,
  • Salmondwinsagain wrote:

The usual US haters are out in force again - what do they want - meltdown???? - poverty - poor getting REALLY poor???? - get REAL please it aint goin to happen despite the doom mongers and BBC so called reporters.

Keep buying shares folks there is a fortune to be made.

  • 24.
  • At 12:12 PM on 12 Mar 2008,
  • john upex wrote:

So the Central Banks increase the money supply yet again. Is the hidden purpose of this to increase inflation and 'inflate away' the (money denominated) losses in the housing, stock and financial markets?

But what is to be the lot of the prudent? - our 'non-equity' savings and wages devalued, our food and fuel costs rising as our currency devalues, all for the benefit of the profligate?

What are the countries with big cash (dollar, euro, sterling) balances going to do? - hold onto their declining assets? - unlikely.

But maybe the (western) central banks hope that they can provoke a rush (by the middle- and far-eastern bankers) to convert 'useless paper' (currencies) into tangible assets, stoking the west's inflationary fires, and creating another stock-market / property bubble to alleviate the symptoms of the endemic disease - well, long enough to get past the US Presidential election and the ratification of the European Treaty.

History doesn't repeat - but it rhymes - start reading the history of the 1930's, people.


  • 25.
  • At 12:12 PM on 12 Mar 2008,
  • merce wrote:

This latest central bank action is
merely hair of the dog.

If the original problem was too much
debt, how can the answer be more easy
credit?

The junkie that is the UK/US economy
needs a period of cold turkey, not another shot to keep the party going

  • 26.
  • At 12:18 PM on 12 Mar 2008,
  • Darren wrote:

At what point do we foresee the financial services sector actually taking responsibility for their own actions? To continue plowing money into an economy that needs a correction of some sort is staggering to see and will only serve to encourage those who have lent or managed money so recklessly over the past few years continue to do so safe in the knowledge that the Federal Reserve, amongst others, will step in and provide assurity to prevent what is becomming an ever growing problem; that being a debt mountain amongst consumers which they are unable to pay back.

There must be a distinct possibility that longer the Fed Reserve and Bank of England persist in trying delay the inevitable correction by propping up the markets with cash the worse it will be for us all because the overall message has become one of 'spend as much as you like, we will bail you out' - the single biggest reason as to why we are in this mess in the first place.

  • 27.
  • At 12:19 PM on 12 Mar 2008,
  • Deepak Chawla wrote:

Don't worry guys its only 28 days rent money

ECB gave $520 billion dollars in Dec 07 for 14 days. So the things went well in Jan 08.

With in case no bank or Financial institution goes bust we will be here again within 2 months.

  • 28.
  • At 12:19 PM on 12 Mar 2008,
  • TRUST_NO_1 wrote:

If you REALLY want to understand the agenda of the world's 'central banks' -
go onto YouTube search on ZEITGEIST and watch the superb short films on the Federal Reserve.

Or try clicking this link

http://www.youtube.com/results?search_query=zeitgeist&search_type=

  • 29.
  • At 12:22 PM on 12 Mar 2008,
  • Scamp wrote:

There's nothing wrong with capitalism but of course we don't actually operate a capitalist system.

We operate a system where wealth is transferred from the poorest to the wealthiest and then disappears.

  • 30.
  • At 12:43 PM on 12 Mar 2008,
  • Andrew wrote:

Mortgaging the future - a dream to some, a nightmare to others!

The credit storm that threatens the future of free-market capitalism as a credible political model is a fascinating reflection of the limitations and problems of the model. Capitalism is all about getting a better return on capital. It rewards those with money at the expense of those that do not. We have moved increasingly towards this system as the solution to all the world's ills and as the best mechanism for decision making.

But as has been so well illustrated in the last few months, this system actually encourages short term decisions and selfish, destructive outcomes. Because we only live for a limited time, we consistently heavily discount the future in all of our decisions and equatations. The here and now is what matters. So we (in the UK and the US particularly) have mortgaged our future incomes, the future of the planet and the future of our children in order for a few thousand people to afford to bathe in caviar and fly their own private jets.

The problem is that, in the long term, we keep growing in numbers and wanting more and more without actually thinking about investing in things that might help us pay for it (like education or infrastructure).

Now this has come back to haunt us. The future has become the present and all that borrowing (predicated against limitless and unsustainable growth in the future) is now due.

What makes me sad is that the governments in the UK and the US are so in thrall to capital that they cannot make those who have caused this mess pay for it, or even consider changing how things will work in the future. Instead those that have not reaped the rewards of short-termism and selfishness will all pay for the excesses of the last twenty years.

Instead of using the remaining capital society posseses to ensure we don't collapse completely, the Fed and the BoE are throwing it at the very people who f*cked it all up in the first place - the bankers and the hedge funders.

Economists and bankers have told us that there is such a thing as a free lunch, because we'd never have to pay for it. Well, the bill is in. And the game is up.

  • 31.
  • At 12:46 PM on 12 Mar 2008,
  • Andrew H wrote:

What do we really want? Sustainable growth, not rampant bubble-creation.

I personally want to be able to feed, clothe, house and educate my family without selling all my earnings for the next 40 years, including future payrises assumed. Is that too much to ask? I want a country where everyone has equal access to resources, not an access based on when you 'got in'.

By the way, for the benefit of the readers, I have undergraduate and masters degrees from a top Russell Group University, two professional qualifications and work for a top graduate employer. I am a higher rate tax payer, and am not yet 30. I am married with a child, and my wife earns more than the average wage. However, despite all that going for me, I still cannot afford to buy a property suitable for my family and I have to privately educate my child since the local schools have admitted that it would be madness to send her to them.

  • 32.
  • At 12:50 PM on 12 Mar 2008,
  • tonyw wrote:

I agree with Robert "That gives them all the confidence they’ll need to make new and even more stupid lending mistakes when the economy returns to its next benign phase."

It's just like every other time, the banks take risks if they come off then the players get huge bonuses, if they fail they get huge payouts to leave. If they screw up really bad then the government prints more money.

As soon as the memory of the last problem fades the rampant speculation starts again using as much leverage as can be had. Same for South Sea, tulips, Florida land boom, 1929, dot com.... banks should be banned from speculating = trading anything for their own books. These guys should go to jail not be given $100M payouts.

LTCM was easy by comparison to this, one organisation to deal with compared to many today.

  • 33.
  • At 12:56 PM on 12 Mar 2008,
  • Daniel wrote:

Banks are the cornerstone of the capitalist system, that's why Central Banks are helping them. Can you go through life without a credit card-yes; can you go trough life without a phone or cellphone-yes;can you go trough life without a car-yes; etc. Not pleasant I know, but it can be done. Can you go through life without a bank account-no. Employers are reluctant to issue a paycheck, no bank will change the paycheck if you don't have an account there; some governement institutions, at least here in Canada, prefer a check over hard cash, a few even refuse to be paid in cash! and you can't let the cornerstone deteriorate without risking the hole building to crumble.

My problem with the help from Central Banks is that, as several comments mentionned, the banks do not get to pay the price of their speculative decisions. More, they will find a way to pass the bill to us customers, and remeber we don't have a choice, so we will have to pick up the tab! We already do pay a certain amount as Central Banks are governement institutions, but that's another story.

My second problem, the most irritating one, is that when there were bubbles that bursted in the past (technology for example), those Central Banks didn't do noting; why? Because the people who lost money were private investors or small companies, who are not cornerstontes to the capitalist system.

Do we need to nationalise the private banks? Not sure it would be better. Do we need to more strictly regulate them? Yes.
One thing looks evident to me, we need to take a better care of the cornerstone; more so because that cornerstone is growing more and more important in the system.

Forget my unconventiennnal english as I am a frenchspeaking individual.

Daniel

  • 34.
  • At 01:17 PM on 12 Mar 2008,
  • Ben wrote:

I'm not sure that you have given an accurate impression here of what the Fed has done. If I understand the Fed's announcement correctly, they are offering to LEND (not sell) T-bonds, against BORROWING (not buying) mortgage-backed securities, for a period of 28 days. This doesn't actually protect any bank from going under directly as a consequence of mortgage related holdings or activities, but it means that if a bank does go under (in the next 28 days, and at the same time as mortgage backed assets take another hit) then the systemic consequences will have to be absorbed by the Fed.

  • 35.
  • At 02:35 PM on 12 Mar 2008,
  • p.kelly wrote:

Apologies to those who've already pointed this up, but it bears repeating: all boils down to PRIVATISE THE PROFITS, SOCIALISE THE LOSSES.

Robert Peston is disingenuous about this 'non-money supply inflating injection':

"It’s a bit of clever financial engineering by the Fed, in that – unlike many of its other money-market initiatives of the past few months – it does represent net additional credit for the financial system." RP

As commentators at the excellent Dow Jones MarketWatch website, www.marketwatch.com, have already pointed out, the 28 day temporary loans exchanging mortgage-backed rubbish for US Treasuries can and will be indefinitely rolled over, which in effect means expansion of the supply of money, period, and consequent further devaluation of the dollar and all dollar holdings - ordinary folks' savings. It's hyperinflation plain and simple folks, whatever they try to tell you otherwise. Go and look at Jim Sinclair's gold investment website, www.jsmineset.com for full facts on what the Fed is up to and its effect on the money supply and paper money devaluation.

The guy who asked about an explanation of the credit default swaps/derivatives thing, should go and look at the following article, 'Derivatives are the new ticking timebomb', by Paul Farrell, interviweing Warren Buffett in yesterday's Marketwatch:

http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7D&print=true&dist=printTop

Clearly this is a similar scenario (in terms of intention) to the BOE and NR.

It is surely getting to the stage where governments need to decide whether we have a free market system or not. I read an excellent book (Investing without fear) which points out hypothetical situations very similar to what is happening now. Eventually the government bond auctions suffer because investors no longer feel safe lending to the government. The government then cannot raise any new funds. (Apparently we came close to something very similar in the early 80s under Paul Volcker).

Investors boycott government auctions because the thinking goes along the lines that they are just going to squander it on bailing out failing and failed businesses. If I am not willing to lend to these business why should I lend to the government that is only going to transfer the funds to these organisations.

Could this be the beginning of the end?

  • 37.
  • At 02:44 PM on 12 Mar 2008,
  • Pete G wrote:

The Limitation Act 1980 shows that responsibility for Negligence extends to fifteen years from the date of the negligent act, or omission.

Now, Law isn't my speciality, but I know that in my Profession this means that I may find myself up on the stand in March, 2023, defending the decisions I take this afternoon.

I have responsibility for guiding my clients on how best to spend reasonably large sums of money (like tens of millions), but these are miniscule amounts compared to the current losses in the financial markets.

So, could it be that we shall see 'regulation' in the form of high profile Negligence actions against the heads of the global financial houses who have played so fast and loose with everyone else's futures?

How very appropriate that would be, and yet how very unlikely...

  • 38.
  • At 03:45 PM on 12 Mar 2008,
  • John Constable wrote:

As banks, and behind them central banks are perceived to be 'the problem', then maybe it is time to see how we might get along without them.

Impossible! you may instantly think.

But hold on, it might just be possible, using this very medium, to bypass conventional banks to a large extent.

We are already seeing what might loosely be called virtual banks springing up on the Web.

For example, Zopa.

Why not think about that .. there could be light at the end of the tunnel.

I feel a song coming on 'ah, ah, going to get along without you now ... '.

  • 39.
  • At 04:04 PM on 12 Mar 2008,
  • mr D wrote:

#9

Why do people always say "hard working" when they mention poor people. From what i can see it is the rich who look for opportunities and risk everything to succeed using only hard and their wits to do it. These people provide jobs and create wealth in the economy. These people should be respected not labeled in the manner you have. As proven in the past Socialism = poverty for everyone.

As a general point, this should be seen as the final phase of the credit crunch. The result will be a number of years of hardship but as with anything the good times will be back. Come august, my savings will be piled into the stock market.

  • 40.
  • At 08:27 PM on 12 Mar 2008,
  • Deco wrote:

Ron Paul, the US Old style Republican is the only American politician who has a clear view of what is happening. Basically, the US Federal Reserve, and the US government is interfering to subsidize a collection of failed banks. The Federal Reserve is going to keep creating money until there are no more trees to cut down, as a means of 'economic stimulus'. The entire economic policy framework that has existed since 1965 in the US and the UK is on the verge of collapse. Basically every year since then American manufacturing and British manufacturing has being losing ground, due to the sectoral growth of retailing and financial services. This trend has reached it's peak under Bush in the US, and Gordo in Britain. Both believe in 'voodoo economics' - with mumbo jumbo explanations that nobody except the most niave and most gullible beleive. Since 1965 the imbalances in the economic and societal sphere have been mounting. The solution to every crisis has been a combination of inflation in the asset class, and deflation in the labour cost class, government regulation of various functions and deregulation of any area which could bring down the CPI, increased borrowing (stimulation) and societal trends that supported this (instant gratification, consumerism ).
To understand where we are now, read the work of James Kunstler. We have built society on oil and the television. We have become bloated zombies, with brand loyalty instead of relationships, pr stunts instead of meangingful policy, and declining standards of education, civility, and environmental health. We have McJobs, and then our financial institutions invented customized financial products to enable people with McJobs to own property, and experience bling, like the societal models, (the Spice girls, footballer wives, etc..). This was a case of making the dominant consumerist excess available to all. A new form of socialism, less restrained and more proud than the old. Another form of socialism is the socialism for the rich that exists when the overtly capitalist government bails out banks, and mortgage agents. This is exactly what is in progress now. Ron Paul is the only politician who has tackled this 'socialism for the rich, and capitalism for the poor'. And this is the economic policy formula that has been applied in the UK, the US since 1965.

The solution according to the Federal Reserve, is to keep it going. And Gordo seems to think along the same lines. More endorsement of the celebrity culture, more support for reckless lending, more penny pinching of pensioners, more pr stunts, and never admit that there is a problem. Gordo see no other alternative. He is applying the policy framework of two generations plus the odd soundbites for restoring the welfare state to keep the Northern urban masses loyal to Labour. The problem for the UK, is that Britain has no Ron Paul. All British politicians are cut from the same cloth, so to speak. And neighbouring states in the EU seem to be locked into the same stupidity. Sarkozy is proving to be a joke, having failed to undo the harm caused by 'the idiots of 1967'(his phrase). And Spain and Italy are both going down the tubes due to bureacracy, overspending, and an inability to adapt to the knowledge economy.
Countries that are outside this nonsensical policy framework are doing fine....India, Russia, Poland, Brazil, Slovakia, Singapore, Korea, Taiwan, Turkey. (some of these countries would barely count as democracies for most Western Liberal commentators....). These are the countries that the Anglo-Liberal media loves to criticise !!!

It is the policy framework. Due to the fact that the US and UK media are comnpletely silent to Ron Paul's argument, I can assume that the policy framework will continue to be in place, until it a gigantic crisis is completely unavoidable !!!!

  • 41.
  • At 11:12 PM on 12 Mar 2008,
  • Tom wrote:

The ONLY guy with enough sense to see this coming was Warren Buffett. The stupid, greedy bankers and their Ivy League MBAs are wrecking the entire financial system. What a mess!

  • 42.
  • At 12:49 AM on 13 Mar 2008,
  • SirVivor wrote:

A Parable for your perusal:
Goldlesslocks Economy was taken to Bernie's for the weekend. Ben and Hank had some difficulty conning the more astute observers at the party into believing that the poor ghoul was infact alive, but by the time the punch bowl was filled for the penultimate time no one seemed to notice or indeed care about the proliferation of green bottle flies on and around the increasingly putrescent guest. Hank, besides being the oberfacilitator for Goldman-Gov a neofaschist conglomerate run from a castle in old Europe, was also a fair ventriloquist. Whist Ben deftly worked silk threads hooked to Economy's protuberent lips Hank had the hapless dupe recite Greenspanisms to prove that not only was she alive but proficient in obtuse obfuscation. Unfotunately the gases of decomposition ended the otiose platitudes as Goldlesslocks started to swell bubblelike - to no one's particular distress until she exploded and then sank into a fetid pool in the depression of her seat.
After the guests had divested themselves of the ichor that had been Goldlesslocks wild eyed they began to wave hands in the air and point fingers, there was even a moist eye here and there. Was it inflation or sudden deflation that had done the poor dupe in? No one could seem to agree. Ayn Rand's name was whispered with distress, as was some obscure Austrian economist and his "crack up boom". Could it be that the deity Keynes could have got it all bloody bolixed...That one could not after all spend one's self into prosperity. That debt had to be paid back at the last act.
As for the party it all ended rather poorly. It seems that the tall hooded stranger in black with the wicked looking scythe at the front door was not there to cut the hedges but rather to perform the more somber task of taking all and sundry to a place of perpetual reflection deemed appropriate by the Lords of Fiat Overcreation.
On the way the boatman, in confidence told his passengers that they had been done in by the salmonelses savings pate.
Alas, ironically now their diet would consist wholly of fish styx.
I guess the moral of this shamelessly abused Aesopism is: that in the end if you cast a jaundiced eye don't be surprised at what will strike at it.

  • 43.
  • At 02:23 PM on 13 Mar 2008,
  • Nick Gotts wrote:

"at some point, the US authorities will presumably have to ask themselves searching questions about the nature of the capitalism they hold dear.

Do they really feel comfortable with a market system in which modest folly is punished but an outbreak of grand delusion is excused?"

Well of course they do, Robert - that's the very thing they hold dear! The whole point of capitalism is to concentrate wealth and keep it concentrated. Really, with your level of naivete, I'm not sure you should be out without your Mum, let alone be the BBC's business editor!

  • 44.
  • At 02:54 PM on 13 Mar 2008,
  • Lino wrote:

Mr Peston's sharp and honest analysis describes the recurrent folly of the financial system players and the concerted action of central banks authorities to avoid the collapse of the financial system.

However it would be of great interest if Mr Peston's gave us his analysis of the probable scenarios in the event of a systemic failure.

Knowing what to expect from near future developments is of great help to all of us who realize that the current situation is unique in its genre and magnitude.
I believe that the lessons of past crisis may not be of great help.

I look forward to reading Mr Peston's analysis and forecast of probable developments. Lino - London

  • 45.
  • At 02:13 AM on 16 Mar 2008,
  • Arthur Hawes wrote:

How can the government bail out a Bank which is a private limited company (PLC) with the taxpayers money?? This applies to the USA And UK. Does this mean that other private limited comapanies have a legal case to prosecute the banks when their overdrafts are called in or pressurised because of the Banks liquidity problems caused by the Banks inefficiency. Many well managed companies will suffer because of the Banks mismanagement and have no working capital help from the government. How about a test case under the Human Rights Act ??

  • 46.
  • At 12:28 AM on 18 Mar 2008,
  • Yummy Carol Kirkwood wrote:

Re: # 5 Gary (London)

Why is it that with every day that passes putting one's savings under the mattress seems the surest way of financial security?


Maybe not. The US is prosecuting a massively inflationary plan in order to try and maintain economic growth. You can be fairly confident that they will simply destroy the value of the US Dollar and cause massive damage to the US economy for a considerable period of time. The Bank of England is under a huge amount of pressure to adopt a similar approach. Hopefully Mervyn King will show the necessary backbone to prevent the UK experiencing massive levels of inflation, but we will be extremely lucky if we don't experience at least high levels. Why do you suppose that gold has now traded above $1,000/oz?

(Unsure if you are aware of it, but inflation is the devaluation of [fiat] currency.)

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