Category: Libor

Libor problems expose central bank incompetency

Rolling back the tape to August 2007 we’ve witnessed several failed attempts by global central banks when trying to alleviate the international credit crunch. Massive interest rate cuts by the US interventionists have resulted in climbing credit spreads across the entire debt market. Of late the powers at be instituted numerous credit facilities to both banks and brokers in a last ditch effort to keep the walking dead from following the Bear Stearns demise. Of course, when looking at Libor, one of the few remaining barometers in credit land, the rational investor should question the “knowledge and wisdom” of the Bernanke Fed.

Since the introduction of temporary and permanent lending facilities from the man behind the curtain the US Fed’s balance sheet has swapped out over $300 billion in treasuries for questionable mortgage backed securities. The unintended consequence has been a banking system reluctant to lend to one another since the Fed will take just about anything as collateral and lend at reasonably low rates. Based on the most recent auction results the Fed will have lent over 50% of their treasuries to the banking/brokerage community by the middle of June!

Commentary the other day by Federal Reserve Governor Richard Fisher should tell us everything about the impotency of our central bankers:

“This is a new development,” Federal Reserve Bank of Dallas President Richard Fisher said during an appearance in Chicago. “I need to learn more.”

Maybe Mr. Fisher, Mr. Bernanke and the other Fed members should take notes when Mr. Volcker speaks:

“A direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in times of crisis: lend freely at high rates against good collateral,” Volcker told the Economic Club of New York on April 8. “It tests it to the point of no return.”

My Comments: Ongoing intervention by global central bankers continues to distort the credit landscape. As banks and brokers drag their feet on mark to market issues related to Level 2 and 3 assets while failing to disclose off balance sheet exposure the lender of last resort has entered the arena. Unfortunately, the policies implemented have failed miserably leaving the obvious question to ponder: How much of the worthless collateral temporarily inherited by the Fed will ultimately end up being owned by the US taxpayer?

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