The Federal Reserve's rescue has failed
By Ambrose Evans-Pritchard, International Business EditorLast Updated: 2:38pm GMT 03/03/2008
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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.
More drastic action eh? So $104 oil and a $1.52 Euro isn't enough damage? We need more rate cuts? $110 oil, $1.60 Euro? Where does the madness end?
Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter. The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe. "I never thought I would see anything like this in my life," said James Steele, an HSBC economist in New York.
It ain't rocket science. When lenders lend they expect to be paid back with interest. When they don't get paid back they lose money. And when they lose money they stop lending since they are scared to lose even more money from unpaid loans. Lenders lent TRILLIONS of dollars to Americans. The Americans took that money and bought McMansions and BMWs. Now they can't pay the money back. And now lenders will no longer lend money because it is too damned risky to do so. And since there is no more free money from the lenders, the price of McMansions and BMWs are plummeting as sales fall of a cliff.
Why is it so hard for the MSM and so-called experts to figure this all out?
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