Wonderful news! The Fed, according to today’s FT, will not allow the US economy to suffer a deep recession. This is so because officials have the will to make it so. And because the US system, say Fed officials, will not allow problems to fester like those misguided Japanese authorities did in the 1990s.

Anyone who thought accepting pennies-on-the-dollar AAA junk as collateral was, conceivably, a form of fester-promotion now stands disabused. Insolvencies?! Those assets are merely illiquid, whatever that Bloomberg report says about them not deserving their ratings. In Monty Python-speak, mere flesh wounds.

Moreover, there is also the Fed-supporting argument that it is right and proper that it acts as a market-maker of last resort to consider. And who would seriously question that. But one does wonder about those words ‘last resort’ and their definition, timing and application.

The survivors of the Andes flight disaster in 1972 faced a last resort decision not of their own making. In contrast, banks and shadow banks unwilling to take timely losses other than by slow nibble or to seek fresh capital are playing chicken with central bankers and ultimately, arguably, neglecting their fiduciary obligations to shareholders.

If they face a last resort it is a product of their own insensibility to prudence and resultant collective obfuscation intended to buy time. All in the knowledge that the occupant of the Fed Chair is no hard nosed a-hole; only a very clever, reasonable guy trying to do the right thing.

So some dreadful festering (sorry) has, in fact, occurred. And it is measurable on the Nipponic Moral Hazard scale. Perhaps it has even now become a last resort situation for the likes of Bear Stearns, if the rumours have credence. Possibly the financial system as we know it is in mortal danger. But above all a localised problem has over time taken on menacing political and economic overtones which could and should have been avoided; and the price of resolving it all now looks far greater than that originally demanded.

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  1. "Cassandra" // 3/13/2008 04:24:00 PM

    Oh what a dreary thought. Do you think the Fed will impose Salary caps upon for example, Lehman Bros when they "absorb" it and others into the Collective? "Resistance is futile..." Oh Gosh who to work for...ADIA or The Fed??
    "ahem...Mr Fuld...you;ll have to empty your own trash-can thankyouverymuch...we're on a real budget!"

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