When faced with strong political pressures from the ongoing disorders of social, economic or financial nature, as we said, it is NEVER a question about governments NOT doing anything, but a question public expectations on the outcome of such actions.
Despite the passage of the $850 billion Emergency Economic Stabilization Act (yes Virginia, additional $150 billion on added porks! From Congressman Ron Paul ``In fact, it wasn't until the Senate had a chance to load it up with even MORE spending, when it was finally inflationary and horrible enough, at $850 billion instead of a mere $700 billion, that it passed – and with a comfortable margin, in spite of constituent calls still coming in overwhelmingly against it. 57 members switched their vote!” How Pork Barrels can easily switch votes is not only a Philippine phenomenon but elsewhere like in the US too!), markets continued to display brutal rioting yesterday and today.
So the Fed came up with even more actions; it doubled its auctions of cash lending to banks to as much as $900 billion, announced the changes in debt issuance which reintroduced 3 year notes and began implementing the paying of interest in bank reserves (Bloomberg).
Nonetheless pressures from various influential quarters of Wall Street “suggesting” to them on how to solve the problem. Example, William Gross of Pimco recently wrote, ``We believe that the Federal Reserve must now act as a clearing house, guaranteeing that institutional transactions clear (and investors receive) their Big Macs at the second window. They must also take another bold step: outright purchases of commercial paper. They should also cut interest rates to 1%, because we are experiencing asset deflation, and the threat of headline inflation is long past.”
From the New York Times today (emphasis mine), ``Under a proposal being discussed with the Treasury Department, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities, according to officials familiar with the discussions. If this were to happen, the central bank would come closer than ever to lending directly to businesses.
``While the move would put more taxpayer dollars at risk, it underscores the growing sense of urgency felt by policy makers in a climate where lending has virtually dried up.”
Nonetheless as the Bernanke's FED and Paulson's US Treasury deliberate on agreeing into Wall Street's formula to further use taxpayer money to thaw the frozen credit markets, Australia's central bank cut its interest rate benchmark by one percentage point to 6 percent from 7 percent signifying ``the biggest reduction since a recession in 1992, to cushion the nation's economy against fallout from a global credit freeze." (Bloomberg).
Most likely both the "suggestions" of lowering interest rates and FED buying of commercial paper will be effected with the former being a "common policy" adopted by most embattled OECD economies.
It's funny how global policymakers seem to tow the line of Wall Street's elixirs when the latter haven't been able to resolve their own problems, to borrow Kenneth Rogoff's quote on the bailout enactment, ``the central conceit is that government ingenuity can disentangle the trillion-dollar “sub-prime” mortgage loan market, even though Wall Street’s own rocket scientists have utterly failed to do so."
This basically serves as an example of regulatory capture where "a government regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating." (wikipedia.org )
Hopefully if the US government decides to abide by the recommendations of Wall Street despite the conflict of interest issues, global markets will finally embrace this for good.
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