The more I think about the US federal reserve continually dumping liquidity into the market and strong arming all the other central banks around the globe, including Canada, to do the same I keep thinking that it is just like popping champagne and passing around bottles of Crown Royal at an AA meeting.
Let’s not forget that this whole problem was started by Greenspan’s low interest rate policy, that led to “creative” new investment vehicles that were trying to bring higher returns to investors. Then let’s talk about the US mortgage lenders who advanced very large loans to loads of high risk borrowers whose capacity for repayment of even the majority of the amounts lent was, at best, highly questionable.
So what is the answer of the current Fed chairman in the eyes of this debacle? Let’s just try and keep the party going. Admittedly I have mixed feelings whether this stance is the right one or not, but there is a part of me who says that if you keep enabling these guys on wall street then they never kick their habit.
If history is any guide, an army of trigger-happy traders will now start punting around in as many esoteric, exotic derivative deals as they can lay their hands on. A recipe for more trouble.
And by failing to encourage banks to ‘mark-to-market’, i.e. to value their polluted loan portfolios at anything like a realistic level, the Fed plan just puts off the Day of judgment.
Because have no doubt, for the giant hedge fund into which the United States has morphed, that cathartic day is on the way.
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