Why the Fed’s Global Rescue Effort Is Doomed

The Fed's newest harebrained scheme will only make things worse

     

Scared afraid concerned business man1 Why the Feds Global Rescue Effort Is DoomedWorld markets got a nice tailwind Wednesday on news that the U.S. Federal Reserve is stepping into the fray along with other central banks to boost liquidity and support the global economy.

Of course it’s nice to see stocks make a hefty jump, but to be honest I’d rather see them rising on real news. Not that this isn’t a good development in terms of stock values — but come on, guys. When things are so bad that the Fed has to step into global markets and essentially bail out the world’s bankers who can’t wipe their own noses, we have serious problems.

Think about it.

The Fed is going to collaborate with the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank and the Bank of Canada to lower interest rates on dollar liquidity swaps to make it cheaper for banks around the world to trade in dollars as a means of providing liquidity in their markets.

Put another way, our government is now directly involved in saving somebody else’s bacon at a time when, arguably, we can’t pull our own out of the fire.

The Fed is cutting the amount that it charges for international access to dollars effectively in half, from 100 basis points to 50 basis points over a basic rate. The central bank says the move is designed to “ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credits to households and businesses and so help foster economic activity.”

Who writes this stuff?

Businesses are flush with more cash than they’ve had in years. The banks are, too. But the problem is still putting that cash in motion — just as it has been since this crisis began.

From Bad to Worse

I’ve written about this many times. You can stimulate all you want with low rates, but if businesses don’t see a reason to spend money to turn a profit, they won’t. And the government can do little to encourage them to spend the estimated $2 trillion a Federal Reserve report estimates businesses are sitting on.

Similarly, if banks don’t see a reason to lend with reasonable security that loans will be repaid, they won’t. And there’s nothing the central bank can do about it, either. Neither low interest rates nor low-cost debt swaps will change the fact that companies and individuals are shedding debt as fast as they can, despite the cost of borrowing being almost zero.

If anything, the Fed’s newest harebrained scheme is going to make things worse. Absent profitable lending, many banks are already turning to bank fees and — like the airlines that are widely perceived to be nickel-and-diming passengers — this is understandably irking customers. Many are changing banks as a result, further fueling a negative feedback loop.

At the same time, ratings agencies are lowering credit ratings on banks worldwide. Standard & Poor’s, in particular, just hammered 15 of the biggest banks in Europe and the U.S. as part of a dramatic overhaul of its ratings criteria. Good move, but they’re literally days late and trillions of dollars short.

The problem is that by downgrading the likes of JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Well Fargo (NYSE:WFC), Goldman Sachs Group (NYSE:GS), Morgan Stanley (NYSE:MS), Barclays (NYSE:BCS), HSBC (NYSE:HBC) and UBS (NYSE:UBS), among others, the ratings agencies have also just baked worse performance into the cake.

The reason is that for every ratings drop, banks need to have additional credit facilities and collateral on hand. That’s why the compliance departments for big banks have been in overdrive recently. They can’t refresh their disclaimers fast enough. The new ratings will trigger automatic changes in existing derivatives contracts, funding commitments and borrowing arrangements.

 
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