$25 Billion for Everyone (ahem, Banks Only)

Tuesday, August 28, 2007

1 question - 2 answers.
Do you experience a financial crisis brought upon you by something called "subprime" although you are not a bank?
Sorry, neither I nor the Fed can't help you because it is your fault that you could not foresee that homes were - and still are - grossly overvalued.
Do you experience a financial crisis brought upon you by something called "subprime" but you are a bank?
Sorry, I still can't help you, but the Fed will help you because it is not your fault that you could not foresee that homes were - and still are - grossly overvalued, isn't it? In order not to risk anything the Fed has come up with a scheme well known in the White House. Instead of flooding the market with fresh money and raising suspicions with investors the Fed does as the administration does: It bends the rules. Banks now can create their own money and 3 already received the all clear sign to participate in the lethal game of monetary inflation with $25 billion each.
Fortune online online alerted the world to the new anarchy in capital markets where the game has moved to a tilted playing field. In order to delay the inevitable collapse of financial markets the Fed now hands out permissions to major banks to grant loans more or less regardless of its capital base.
Is this the inofficial burial of Basel II?
Or is it just another manipulation of markets with money created out of nothing? Why are lenders bailed out but the borrowers are left holding the bag they got lured into ?

JP Morgan, Citigroup and Bank of America are now allowed to lend an additional $25 billion each to their securities subsidiaries, regardless of the capital/assets ratio. Hey, that's another $75 billion created at the cost of 3 letters and it doesn't show up as an emergency Fed open market operation.
It looks as if we have arrived at the end of free markets as soon as first cracks appear in the financial house that was built on leverage and low interest rates.
Markets are now run by the Fed's decree which has striking similarity to the issuance of presidential executive orders: Nobody breaks the law because the Fed now says so. Capital ratios are only relevant for small players, it appears.
Funny Money
The sleigh-ride into the era of funny money is an abrupt turn from free market principles. All this while the economy is still in relatively tame waters compared to the 1970s.
One thing should be clear by now to every market participant. Fed chairman Ben Bernanke will certainly not risk a monetary contraction on behalf of the Fed. The taps are wide open and the Fed will continue to douse the fire with ever more petroleum. But it will pay a price in time.
Money supply growth - now running around 13% and expected to spike higher - with no corresponding value creation is the classic Austrian definition of monetary inflation.
The actions taken by central banks so far did not result in the effect so deeply wished for. Instead of restoring calm to the markets the creation of some $500 billion dollars only managed to feed the worries of a market that has suddenly found out that every potential return falls and rises congruently to its risk.
But we can rest assured that Bernanke will live up this promise to use all available options - within the law or not.
Seeing that the evil policies of the White House have now found eager copycatters in the Fed I stay my course of staying away from anything that depends on the Federal Reserve dollar. This currency is dead. We are only fighting about the style of the burial.

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