Another bailout, more grasping at straws

As you have likely heard, the Federal Reserve, in coordination with other central banks around the globe, injected cash into world markets to ensure that credit remains available to European countries in need of cash:

The central banks of the wealthiest countries, trying to prevent a debt crisis in Europe from exploding into a global panic, swept in Wednesday to shore up the world financial system by making it easier for banks to borrow American dollars.

Stock markets around the world roared their approval. The Dow Jones industrial average rose almost 500 points, its best day in two and a half years. Stocks climbed 5 percent in Germany and more than 4 percent in France.

Central banks will make it cheaper for commercial banks in their countries to borrow dollars, the dominant currency of trade. It was the most extraordinary coordinated effort by the central banks since they cut interest rates together in October 2008, at the depths of the financial crisis.
[…]
“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the central banks said in a joint statement.

China, which has the largest economy in the world after the European Union and the United States, reduced the amount of money its banks are required to hold in reserve, another attempt to free up cash for lending.

The display of worldwide coordination was meant to restore confidence in the global financial system and to demonstrate that central banks will do what they can to prevent a repeat of 2008.

It’s not surprising, given the state of Wall Street — its love of corporatism, cronyism, and rent-seeking, that there was a rally that pushed stocks higher; as if their approval justifies such intervention. It was wrong in 2008 when Congress approved TARP and it’s wrong now. And keep in mind that the Fed has poured $7.7 trillion into banks to do the very same thing they hope to accomplish with this new action.

Concern about the debt crisis in Europe has been on the mind of many over the last several months. But as is being reported, this does absolutely nothing to deal with that specific issue, as Confounded Interest notes, “The reaction has been relatively positive for Europe and the U.S. in term of equities (the illusion that this might work). Given that [the central banks’] efforts will only delay the Euro meltdown for a couple of weeks, this seems like an overreaction.”

In short, this is another bailout that may temporarily continue the high, but the hangover is just around the corner and it’s going to hit hard.

 


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