Over the past few days the U.S. Federal Reserve, the European Central Bank, Reserve Bank of Australia, and the Bank of Japan have, together, injected some $400 billion of liquidity into the world's credit markets.
Most interestingly, the oldest of central banks, the Bank of England, did not enter this liquidity dosing spree.
The New York Times has a major editorial, "Failure to communicate," which commented, "Unfortunately the Fed's deft and timely response has not been matched by the White House or the Treasury Department, which have yet to exert strong leadership or even convey a full grasp of the seriousness of the problem."
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As readers know, we feel the Fed was more cowardly than "deft".
Indeed, we feel that the Fed and our government risk being found asleep at the wheel (playing soothing music while Rome burns) as our economy dives into recession with such force and fear that it could lurch into depression — an evil condition that would hurt us all.
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As we said last week, it was massive liquidity that caused the asset boom.
As far as residential housing was concerned, it was a boom financed largely by almost deceptively aggressive mortgage brokering, impudent lending by banks, irresponsible "packaging" by investment banks, and highly leveraged and irresponsible investment by certain hedge funds, gambling on high yield and high fees, with their clients' wealth.
It's nothing short of amazing that our Fed would choose to salvage the problem by overdosing on liquidity — the very medicine that caused our present problem.
But then, it appears that the Fed was not trying any form of bail-out, but merely to restore vital liquidity to the major banking division of credit markets.
Liquidity has been restored to the inter-bank market. But, it appears that today, lenders are still scared to lend.
If our banks won't lend, what about liquidity for corporations, and perhaps most important of all, for consumers?
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As we also said last week, pushing vast amounts of liquidity at banks who do not want to lend, is like pushing on a string — most ineffective.
The Financial Times leads on the $3 billion bail out at Goldman. The current news that Sentinel Management has sought permission from their regulator (CFTC) to "freeze" their investors' funds tends to confirm our view that we are not merely in a liquidity crunch but in an ever widening Crisis of Confidence.
Already, CNBC has seen that the ($2.2 trillion) commercial paper market is appearing nervous and that nervousness could soon spread to (non FDIC-insured) money market funds.
Today's news of profit declines at Home Depot and Wal-Mart show what we have said for weeks, that U.S. consumers are pulling in their horns, particularly at the lower end of the market.
We believe that our economy has been stalling for several weeks and that it will be reflected in a hit to corporate earnings in the final two quarters of 2007.
My colleague David Frazier wrote an impressive article showing how this would lead the stock markets into a plunge, which you can find in the Experts' Corner archives on the MoneyNews.com website.
In short, the liquidity crunch is not restricted to the inter-bank market, but now extends to the hard pressed consumers and through them to corporations and financial institutions.
If consumer spending stalls, as we feel it is doing, we will experience not the "soft landing" our President forecast last week, but a hard landing in a deep recession.
In order to turn our economy away from a crash, an urgent and major reduction in interest rates is called for.
However, instead of reacting decisively and boldly to lower rates, our Fed appears to believe our government's siren reassurances and remains frozen at the wheel of curbing inflation.
Having ignored the "true" rate of inflation (computed on the pre-Clinton basis at some 6 percent) our Fed now continues to talk tough on inflation.
This is most worrying as it comes at the very time that urgent action is called for, to breathe new life into our economy.
We believe that our Fed has overdosed on the "aspirin" of liquidity and is now in a coma, blinded to the urgent need to drop interest rates.
True, a reduction of interest rates might allow certain financial gamblers temporarily off the hook. But we must look to the vital interest of our nation as a whole and that is to avoid a depression.
If we enter a depression, from a far more leveraged and socially-troubled position than in 1929, the experience will be far, far worse.
It must be stopped at all costs.
I do not often agree with the New York Times. But they are right to say that our government is misleading us and dangerously so, as they did over Iraq.
Tomorrow is the last day for investors to deliver written notice of hedge fund redemptions for the last quarter of 2007. It could prove an important date, as consumer liquidity becomes squeezed.
Now, we must all hope the Fed, the Treasury, and the White House wake up to the acute economic situation currently developing in our country, stop the insincere cheerleading, and act responsibly.
In the meantime, we urge readers to continue accumulating cash and gold.
In addition, we now add a further cautionary note. Our readers should think of diverting funds away from non-bank (non-FDIC insured) money market funds and invest in 90-day Treasuries, with the full faith and credit of our government, which still has at least some time to run, before gold becomes an emperor.
For my latest recommendations for protecting your portfolio — and profiting — from the Derivatives Debt Crisis, Go Here Now.
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