The unwinding drama in the credit markets already looked like a Greek tragedy before the appearance, on Wednesday, of a deus ex machina, notes the FT’s John Authers in Thursday’s Short View column. When Greek dramatists could not resolve a tragedy, a god could be winched on to the stage using a crane.
Markets initially treated as divine intervention the news that the Federal Reserve would expand its term securities lending facility to $200bn, and accept mortgage-backed bonds as collateral for up to a month. The move should give the affected players more time to deal with liquidity difficulties.
But within hours, the prices of gold, oil, the dollar and US financial stocks were all roughly back where they had been at the start of trading on Monday.
This continues a pattern. Since the credit crisis began last July, almost all market rallies have come after acts of external, if not divine intervention.
Here are some other dei ex machina, that were once supposed to winch the market out of its funk: the Fed, when it cut the discount rate last August, again when it launched the term auction facility in December, and again with its emergency rate cut in January; the US Treasury and its “super-SIV” plan; the Abu Dhabi Investment Authority and its purchase of a stake in Citigroup; and Warren Buffett with his offer to buy the healthy part of the monoline bond insurers. None of these rallies lasted long.
It remains hard to fault the Fed. Wednesday’s action should help the market’s liquidity problem, caused as banks call in loans. It is appropriate for central banks to alleviate this problem.
The underlying issue is one of solvency rather than liquidity. Many assets are not worth as much as many had optimistically assumed.
Neither the Fed nor anyone else will enter from stage left to sort out this problem. Tragically, the solution will involve some pain.
