FED Bails Out Europe
Issue: 12/12/07 Wednesday
Today was an historic day for the Federal Reserve. After making their 0.25% reduction in the Fed Funds rate yesterday, today it made another very important announcement, and it’s having ripples across most markets.
The Federal Reserve announced that is going to put $64B more liquidity into the economy. Why would it make this precedent by NOT announcing it yesterday? Well, the Fed thought that it didn’t want people to confuse it’s “serious” statement of yesterday with its liquidity injection announcement today. I totally disagree, and believe the Fed is making itself look like a bunch of rookies.
Here are the details. The Fed will hold a “special” auction to allow all banks (think thousands of them) to get sorely needed money onto their balance sheet. Why don’t these banks just go straight to the Discount Window and borrow at the Discount Rate? Well, banks say there is a stink, actually they call it a stigma, to borrowing from the Discount Window. That stink comes from banks with sub-prime loan write-offs, and other banks need money caused by the spillover of the sub-prime mess, but don’t want that stink associated with them. Do you remember that earlier this year the Fed opened the Discount Window to allow banks to get their needed liquidity?? Well, it looks like that plan failed.
The Fed’s response is to hold two $20B auctions where banks can bid for the money they need. That’s $40B. These auctions will happen very soon. What about the other $24B?? Well here is the very special news. The Feds are extending their credit facility to the European Central Bank for $20B and the Swiss National Bank for $4B over the next 6 months. The purpose is to shore up the European banking system. That all adds up to $64B. And, here is the great news, we’re bailing out the Europeans. It’s okay to bail out the Europeans, we did it back with the Marshall Plan too.
Here is the serious point I want to make. The Fed wouldn’t be injecting $64B into the economy if there wasn’t a BIG problem out there. This is in effect an announcement that our economy is hurting badly, and the Fed needs to act. It is so important that the Fed acts that it is creating history by doing something it has NEVER done before.
Let’s put this action into perspective. It’s a $64B injection. The only time more liquidity was ever injected was immediately after 9/11. This is truly historic.
The other news – was there any??
The sub-prime meltdown continues. Wachovia, Bank of America and PNC all announced they are increasing their write-off provisions, and maybe they aren’t don’t yet. No fooling!!!!!! Maybe these guys were trying to sneak in under the radar of the Fed announcement.
What about the markets?
The stock market went skyrocketing off this morning, and then steadily lost over 200 points to end up just 41 points higher than yesterday. It was disappointed with the Fed action yesterday, and it is disappointed with the Fed action today. The bond market displayed the “uncertainty” that the Fed just announced by increasing treasury interest rates across the board. Remember, the bond market likes certainty. It doesn’t like surprises – and this was a big one. The currency markets went sideways – probably trying to figure out what this all means to exchange rates.
Don’t let this big news lull into thinking other markets are asleep. Oil jumped $4.37 because “inventories fell for several weeks”. What a bunch of bull. This was a drive by speculators on the news of the inventory fall. Oil inventories fall this time of year normally. And, more importantly, the total reserve is higher than normal. You’d think this would mean a decrease in oil prices. Nope. It means that people are manipulating the market again.
Here are Wednesday’s closing details:
DJ30 – 13,474 (Up 41 points) – after going up about 250 points in the morning = effectively a big down day.
10 year US Treasury Bond – 4.08% (Up 0.08%) – caused by the Fed move.
Euro $1.4709
Gold closed at $819 per ounce. (Up $2)
Oil Closed at $94.39 (Up $4.37)
Gasoline is $2.41 (Up $.12)