On news that the Fed and other central banks are going to intervene in the sagging US mortgage market, stocks got off to a roaring start today. The Dow Industrials, the most watched stock index in the world, opened 200 points higher, for nearly a 2%. The NASDAQ, which opened 50 points higher, did see a 2% increase. To stock investors, the Fed was the cavalry riding to the rescue. But, is the optimism justified? Will the rescue be successful?
The Fed announced that it plans to lend up to $200 billion in exchange for mortgage-backed securities now held by the banking industry. The move falls short of calls for the Fed to make outright mortgage purchases of mortgage debt, but the move is certainly a huge step in that direction. If losses on the sinking mortgage debt continue to eat at the balance sheets of the major banks, how will the Fed not take the final step and buy the mortgage paper?
Although the Fed lowered its discount rate 1.25% in January as direct result of deteriorating debt markets, the problem has not gone away. Around the world, banks have suffered mortgage debt losses in the billions. Even after the Fed made the extraordinary January cuts, in England the government had to “nationalize” (take over) Northern Rock Bank in February after depositors lined up to withdraw their money. If there is anything that scares governments, it is people lined up outside banks.
This conflagration, which was ignited during Alan Greenspan’s tenure as Fed Head, threatens to burn down our financial house of cards, a banking system built on paper money. Greenspan ignited the fire by lowering its discount rate to 1%, then attempted to put it out by boosting interest rates as price inflation raised its ugly head. Now, Greenspan’s successor, Ben Bernanke, is devising schemes to keep the blaze under control.
Such is the problem that last month the Fed announced a “new tool” to alleviate pressures in the credit markets. That new tool was dubbed the Term Securities Lending Facility and is to make available $200 billion for the purpose of “lending Treasuries to primary dealers.” ($200 billion here, $200 billion there, pretty soon we’re talking some real money, to steal a phrase from the late Everett Dirksen.)
The “primary dealers” just happen to be the big banks, and this rescue program also involves other central banks. The problem truly is worldwide, and the Fed will not stop throwing paper dollars at the problem as long as dollars are accepted. When the dollar is finally repudiated, the game is up.
Meanwhile, a small segment of investors has begun rejecting paper dollars. That would be those investors who have turned to investing in gold. Many are making investments in silver as well. When people become concerned about the excessive printing of paper money, they always turn to gold and silver, and logically so, for gold and silver have proven to be the best forms of money ever used by mankind.
As for the Fed’s intervention affecting gold and silver, it has. Precious metals prices remain strong.