Le Temps Editorial/ 20 August 2007
While the "new global financial order" should have undergone its first test with the bursting of the credit bubble, it is becoming clear ... that it will not undergo a test. Certainly, the monetary authorities' mission includes intervention when paralysis threatens a system that is short of liquidity. But in recent days, the American central bank has primarily acted preventatively, with an unprecedented haste, rushing up at every stock market hiccup. And the Fed will probably submit to the will of the markets and lower its interest rate September 18, or even earlier.
We are consequently witnessing a public takeover of private losses, even in the absence of major bankruptcies or systemic crisis. The system is allowed to realize profits, but taking on short-sighted risk is not supposed to entail any costs. This interventionist policy has only an illusory response to offer: adding liquidity to a system already sick from a prolonged liquidity excess (2001-2005).
In fact, the Fed has never been so impotent. Banks and investment funds will suffer losses as a result. There will be mass layoffs, liquidations of investment funds, sales of bank divisions. And if the economy ends up feeling it, the recession will know how to circumvent the central banks. They will neither be able to save banks from investors' withdrawals, nor to pardon the economy from the impact of financial debacles, nor to spare financial operators the red lights when the market turns around, nor to prevent yield from transforming itself into risk.
They can only attempt to make people forget a taboo: that American growth is no longer possible without debt and financial leverage. This unheard truth puts the Fed into an impossible situation: when easy money generated a euphoric growth (2003-2006), the Fed was unable to raise its rates for a long time. The enormous over-indebted market that proliferated in the meantime could not bear it, and has since turned sour to the point of threatening the economy. In fact, the Fed finds itself forced to keep the debt bubble on an IV by permanently maintaining a policy of accommodating interest rates. Yet the latter is incompatible with economic growth, generating inflationary tendencies. If every American, without even saving, really spent in line with what they earn, would growth be what it is? The game is so distorted....
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