On Wednesday, August 15, in an interview with Bloomberg TV, the President of the St. Louis Federal Reserve, Mr William Poole, made the statement that only "a calamity" would justify the Fed cutting interest rates now. Mr Poole went on to say this: "It's premature to say that this upset in the market is changing the course of the economy in any fundamental way." He added that the Fed would have to see some real evidence before making a move on interest rates.
You can read a report on Mr Poole's remarks in this Reuters story.
The next day was Thursday, August 16. All kinds of proverbial "hell" broke loose on global financial markets and the Fed (not to mention Wall Street) saw the "calamity" rolling straight towards them across the time zones. There was carnage on Asian stock markets which quickly dragged their European counterparts down with them when they opened. More and more businesses were reporting that they could not borrow, either because they were cut off entirely or because the rates being asked were such that they could not afford to pay them. Without access to borrowed capital, they could not pay. The interbank payments system freeze-up was intensifying. And on top of everything else, exchange rates fluctuated to an extent which signalled the imminent demise of the Japanese Yen "carry trade". The Yen itself soared while the major beneficiaries of this "carry trade", the Australian and New Zealand Dollars in particular, dived spectacularly.
If you have been following the growing degeneration in paper "assets" since its inception back in February with the first signs of US subprime mortgage granters' difficulties, you know that EVERY worsening stage has been met with ever louder "assurances" that the problem was an isolated one. When the problem first broke out, it was only going to affect "irresponsible" lenders in the US with no possible ramifications on the wider markets either inside or outside the US. Now, of course, it is hanging like a financial storm cloud over the entire global interbank payment system. Worse, it is threatening the sustainability of the global credit expansion which led to it in the first place.
But the Gold price hardly moved in Asia on August 16, and moved down by a very modest amount on the London Gold fixings given the intensification of the stampede to "get liquid". Once US markets opened, the noise reached a crescendo. On Wall Street, the Dow was down 342 points intraday, just over 10 percent below its highs of less than a month earlier and therefore in a correction, according to official definition. Commodities (including precious metals of course) were smashed flat across the board as the flight into "cash" intensified.
But by the close of trading on August 16, the Dow had turned a 342 point loss into a 15 point loss. The comeback was led by the same sector which had dragged the index down earlier in the day, the financial sector. Needless to say, this gigantic recovery in paper was not matched with commodity and metals prices.
Many of the mainstream analyses of the US market comeback in late trading on August 16, especially since it occurred in the financial stock sector, pointed to "rumours" that the Fed might not wait until the next scheduled meeting of the FOMC to cut official rates. In fact, much of the rumour was to the effect that the Fed might do it the following day. Yes, most of these same analysts were aware of Mr Poole's statements of the previous day.
In the event, of course, the Fed DID cut rates on Friday, August 17. But they didn't cut the Fed Funds rate, they cut the DISCOUNT RATE - by 0.50 percent to 5.75 percent. Here's the problem with that. The Fed Funds Rate is the rate at which the Fed makes bank reserves desposited with it available. The DISCOUNT RATE affects emergency borrowing by banks in distress. Traditionally, banks are very leery of using the "discount window" at the Fed since this is an admission of weakness. The other problem here is it remains to be seen whether the Fed will broaden the criteria of what paper it will accept at the discount window.
If "Calamity Bill's" statement of August 15 is to be taken seriously, what the Fed saw storming towards them on August 16 was indeed an emergency. The $US 20.60 fall on the spot future Gold price on the following day (almost all of which took place in the US) is conclusive proof of that. And so is the Fed's reaction, and so is the Fed's snap conference call on the evening of August 16 and the cutting of the Discount Rate the following day - BEFORE the market opened.
The hopes on Wall Street and throughout the global financial sphere is not that this action will "fix" the problem with excessive and unrepayable debt and the leverage that debt has afforded the paper markets. The hope is that it will convince enough people that the "fix" is in, and that business as usual can now be safely resumed. It may work, for a day or a week or even a month. But the fundamental and UNFIXABLE flaw remains unresolved and unexamined. There is no way to perpetuate a debt based financial system in perpetuity. The longer the attempt lasts, the greater the disruption when it can be supported no longer. The events of the past week are proof of that, and a foretaste of what is to come.
On top of that, and away from all the complexities and smoke and mirrors of "high finance", the meltdown on US markets and the "liquidity crisis" has actually reached the bank teller's window. At least it has in San Francisco.
Here is the story, as reported on Marketwatch.com.
On August 17, while the Fed was lowering the Discount Rate and US markets were rallying with huge sighs of relief, customers of Countrywide Bank, the banking arm of the hard pressed US mortgage lender Countrywide, were lining up in front of the teller's counters to pull their money out of the bank. Yes, these customers knew that the Federal Deposit Insurance Commission (FDIC) insures all bank accounts up to $US 100,000. Yes, many of thes customers by their own admission felt "silly" in taking such a move. But they took it anyway, and they would not take "no" for an answer. One customer even had the temerity to say that he was - "thinking of buying gold."
In February this year, the first reports of subprime lenders being in trouble in the US began to filter out into the mainstream US media. Here we are seven months later with the world in financial turmoil. And now, the first indications are appearing of a distrust of the US BANKING SYSTEM by the US public themselves. Gold fell $US 20 on August 16 at the climax (so far) of a desperate rush for "liquidity" inside the financial system. A banking RUN is a rush for liquidity OUTSIDE the system. Gold regained nearly half its August 16 losses the next day.
Yes, these are only the first signs of distrust with the banks themselves. But every stage in this climbing financial meltdown has started small, and then snowballed VERY quickly. Stay tuned on this one.
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