Wednesday, November 30, 2011

Be careful what you wish for?

The stock market soared today, gaining almost 500 points after consecutive days of good economic news and a commitment to prevent further crises in the banking industry.

We should be smiling, right? The Globe and Mail reports we might want to pause before doing that.
What’s great for the banks isn’t so good for everyone else, though. Investment strategists already are noting the desperation of the move, adding that flooding the banking system with liquidity doesn’t do anything to solve the real problem of ballooning, unmanageable debt levels.
“It doesn’t solve the overall problem,” says Robert Pavlik, chief investment officer with Banyan Partners in New York. “Even if they are able to stabilize the banks in Europe, they’re almost prevented from lending because of capital requirements, the unwinding of assets and the austerity measures. It’ll be like what we saw in the U.S. a few years ago where they got cheap money but never lent out any of it.”
Paul Nolte, managing director at Chicago-based Dearborn Partners, says this is just another stop gap that kicks the proverbial can down the road.
“Debt is the overarching issue. What occurred today does nothing to reduce levels of debt. It just shifts it different holders,” Nolte says. “In the short run, the liquidity is a wonderful thing. But in the long run, you have to repay it in some fashion.”
Could today's actions could be viewed as a way of the U.S. trying to bail out Europe from its currency miseries? Reuters notes that one Federal Reserve member says no

"We are not bailing out ... Europe," Dallas Federal Reserve Bank President Richard Fisher said in an interview with Fox Business Network. "We are trying to meet a shortage of dollars."

He said the action was aimed at making sure there were ample dollars for those who wanted to buy U.S. products, and that European officials still needed to address the debt crisis that had led to dollar funding strains among banks in the region.

"They need to pull their socks up just like our Congress needs to do and get their act together and solve the underpinning uncertainty," Fisher said.

The Dallas Fed chief denied there was a specific triggering event that led to the coordinated action among the Fed, European Central Bank and the central banks of Japan, Britain, Switzerland and Canada. "There is no dramatic event," he said.
I defer to those who know the financial industry better than I to report whether Mr. Fisher's comments are legitimate or spin. 

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