Aug 20 2007
How much more damage do the Central Banks want?
Falls on the Stock markets??have been????the inevitable outcome of
a) Absence of knowledge of where the bad debts lie and how many - if any - institutions are in trouble
b) Central Banks still saying interest rates in Euroland and UK may go up
c) Very public announcements of how much temporary assistance has been needed each day to see the system through the jitters
??Markets will rally and stabilise only when
??a) Market participants can form a sensible judgement of how much damage has been done
b) They think the authorities no longer want there to be more declines (so-called re-pricing of risk), and have shown that by telling markets interest rates will start to fall as inflation is under control.
??The rally on the back of the US offering some money to the banks themselves at a less penal rate is not a solution to the whole underlying problem. It stops immediate illiquidity, and allows some more slightly higher priced business to take place, but it does not tell markets that the sub prime crisis is over and we know its full effects.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
I’m very concerned at the way the Fed and ECB are trying to use stop-gap meaures to eradicate an underlying and not fully defined problem. Events must be allowed to run their course. When a problem exists with cash-flow it is far better to follow a Darwinian rationale and let the market iron out the problems in line with market forces. The invisible hand must govern events.
[...] morning malaise #1 20 08 2007 21.56 Update: John Redwood confirms exactly what we’ve been saying here about the Fed’s quick-fix … [...]
I’m grateful for your incisive analysis, John — the Fed is effectively only offering a quick fix — and this may have consequences for our Economy. I have quoted your last paragraph on my blog:
http://thewiltedrose.wordpress.com/2007/08/20/monday-morning-malaise-1/