"The Federal Reserve's rescue has failed"
The UK Telegraph continues their tradition of being better able to report on America's fiscal problems than our own media with today's story on the failure of the Federal Reserve to fix the credit mess:
The verdict is in. The Fed's emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.
t is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.
The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) "term-auction" market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time.
"I never thought I would see anything like this in my life," said James Steele, an HSBC economist in New York.
The problems in the Muni market are still there and getting worse. Also, well respected lender Thornburg Mortgage can't meet it's margin calls today and it's stock is crashing as I write this. Analysts aren't optimistic about the future of the company and are cutting it to a SELL (late as usual, I see) even at these low prices.
No sane mortal needs to know what term-auction means, except that it too became a tool of the US credit alchemists. Banks briefly used the market as laboratory for conjuring long-term loans at Alan Greenspan's giveaway short-term rates. It has come unstuck. Next in line is the $45trillion derivatives market for credit default swaps (CDS).
Last week, the spreads on high-yield US bonds vaulted to 718 basis points. The iTraxx Crossover index measuring corporate default risk in Europe smashed the 600 barrier. We are now far beyond the August spike.
Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007 fell to a record 12.72pc of face value on Friday. The BBB tier fetched 10.42pc. The "toxic" tranches are worthless.
Why won't it end? Because US house prices are in free fall. The Case-Shiller index for the 20 biggest cities dropped 9.1pc year-on-year in December. The annualised rate of fall was 18pc in the fourth quarter, and gathering speed.
And here is the truly scary part:
UBS says the cost of the credit debacle will reach $600bn. "Leveraged risk is a cancer in this market."
Try $1trillion, says New York professor Nouriel Roubin. Contagion is moving up the ladder to prime mortgages, commercial property, home equity loans, car loans, credit cards and student loans. We have not even begun Wave Two: the British, Club Med, East European, and Antipodean house busts.
We all know how the Federal Reserve will continue to respond to this: lower rates, lower rates, print more money, print more money. Is it any wonder that Gold and Oil hit all time highs again this morning?
