When a counterparty fails, spreads and volatility sky,
resulting in amplified systemic loss, such as we have
seen during this crisis. For example, a failure
of 50 bln. CDS results in a systemic loss of 400 billion or
more due to this effect. Liquidity injected by the Fed
and their guarantees prevent that natural process from
happening. What they are essentially doing is assuming
the losing side of a derivative contract when the losing
side cannot pay up. They print money to do so. These policies of guaranteed
contracts essentially were in effect for the duration of
the credit bubble and derivatives bubble, and still are.
The Fed has been micromanaging the market since the
stock market (internet bubble) blew up in 2000, which
is why volatility decreased to below 10. Eventually
derivatives grew bigger than that micromanagement and blew up.
Since the Ponzi scheme really can't grow to infinity and
the Fed remains the guarantor of last resort, the only
way it will blow up is through a complete systemic failure,
which, in case of the Fed being a guarantor for all obligations,
means the currency going to zero as they pay up with
printed cash. An alternative, more reasonable, policy
would be to let the Ponzi scheme blow up and focus on
restoration of the real US economy, rather than Ponzi
scheme maintenance as they do now. We'd see big time
deflation NOW, thou. They are trying to shift the
problem to future generations yet again, while the
only real cure is to can that Ponzi scheme instead
of guaranteeing it and trying to reinflate it. IMHO. |
