The Oil Drum

EYE ON AMERICA
Your move, Mr Bernanke
By Walter T Molano

http://www.atimes.com/atimes/Global_Economy/IH29Dj01.html

'There is a consensus in the northern latitudes of the Western Hemisphere that the US Federal Reserve under chairman Ben Bernanke will magically solve the markets' woes. Asset prices rallied last week, as television commentators debated whether the US central bank would cut interest rates by 25 or 50 basis points. Politicians from both sides of the aisle called for a reduction in rates and an increase in liquidity. Although the United States insists on central-bank independence as a precondition for multilateral assistance, it does not feel it should be held to the same standard. The televised assurances by senior politicians that the Fed would ease interest rates made a mockery of the nation's monetary authorities. Moreover, the notion that a reduction in interest rates would solve the ongoing credit crunch was a naive understanding of the damage that has been done.'...snip...

'Banks are slashing lines of credit, paring back trading positions and refusing to roll over commercial-paper obligations because they must husband their cash. That is why a 50-basis-point cut or a 400-basis-point reduction in Fed Funds will not do anything to restore confidence. It is also the reason the markets will panic the day after the Fed's hand is forced on September 18, when they realize that financial institutions will still be unable to move the collateralized derivative structures off their books.'...snip...

'That is why, regardless of what the Federal Open Market Committee does on September 18, bank regulators, risk officers and boards of directors will think twice before buying another collateralized derivative obligation. Without limitless access to credit, US consumers will have to reduce spending, thus marking the onset of a global contraction.'...snip...