So it's extremely enlightening to see the actions of the European Central Bank last night when a credit crunch developed (caused ultimately by subprime and causing short-term rates to spike as banks in Europe scrambled for cash) and the ECB acted to inject liquidity, meaning they created a bunch of money from nothing and lent it to anyone who asked for it.
The reason that action is so telling is this: the potential of a subprime-led cash crunch is not new**. In fact, as early as January of this year, not only was the ECB talking about it, they were warning investors not to count on them for a bailout:
Jan. 26 (Bloomberg) -- European Central Bank council member Axel Weber said investors shouldn't expect central banks to bail them out in the event of an "abrupt'' drop in financial markets.
"If you misprice risk, don't come looking to us for liquidity assistance,'' Weber said in an interview in Davos, Switzerland at the annual meeting of the World Economic Forum.Investors ignored the warning, counting instead on what has become known as the "Greenspan Put," that rush of central bank money any time a problem develops in the market. Who was correct? Investors were:
Aug. 9 (Bloomberg) -- The European Central Bank, in an unprecedented response to a sudden demand for cash from banks roiled by the subprime mortgage collapse in the U.S., loaned 94.8 billion euros ($130 billion) to assuage a credit crunch...Some "fine tuning." Not only did the ECB come thru to bail out investors, it came through with 150% of the cash called for after 9/11. There's a similar story with the Fed, which sent William Poole out a few weeks ago to tell investors they were on their own and then provided emergency cash last night to save their bacon.
The ECB said today it provided the largest amount ever in a single so-called "fine-tuning" operation, exceeding the 69.3 billion euros given on Sept. 12, 2001, the day after the terror attacks on New York.
Two weeks ago the story was:
The Fed should only act "in due time" if evidence accumulates that the market upsets threaten to cause price stability or low unemployment, or when financial-market developments threaten market processes themselves, Poole said.And yet the Fed acted. And markets are now expecting the Fed to lower interest rates at or before their next meeting, scheduled for September. Action always leads to the expectation of further action.
So one of two things is true. Either the Fed and the ECB are liars who say they will stay out of markets and yet stand ready to inflate at the slightest sign of trouble****, or the current market "threaten(s) market processes themselves," in other words, we are on the verge of a market-locking, gut-wrenching crash across multiple markets.
I don't know which it is, except that it's possible if not probable that both are true simultaneously. In the meantine, anyone up for s'mores?
* If a reporter is looking for a bullish quote, he speaks to an analyst known to be bullish, if he's looking for a a bearish quote, he speaks to a bearish one. In reading the tenor of any story, one can almost predict who will be quoted, since the quotes are surprisingly consistent over time.
** As much as it would bolster my ego were it true, I didn't discover or invent it. I just drone about it interminably.
*** The position taken by the market at large.
**** eventually causing a crash in the dollar and simultaneously encouraging investors to ignore risk and take actions that will ensure that crash is fatal.