Please nip over at some point and have a look at my post about the root cause of the financial crisis. It will make this post make more sense.
I have already pointed out that the root of the problem is that many companies are functionally bankrupt because they are holding debt that has no value. They do not want to admit they are bankrupt. The powers that be are so afraid of a system collapse that they are not willing to force companies to come clean. I personally think that they are making a system collapse much likelier with their current actions. More on that in another post.
The current claim is that “the markets are frozen up and need more liquidity”. This is a load of bunk. What is actually going on is that a lot of people without enough money are trying to pretend they have money, and the Federal Reserve Bank (”The Fed”) is trying to help them do it. The Fed is doing this by making huge short term loans.
Here’s how it is done:
The Fed dumps a ton of money into the market, as loans. Companies take those loans, and try to pass the money around as fast as possible, to prove to any doubters that they aren’t bankrupt, and then give the money back to the Fed.
It’s a bit like a man with $1 that owes five people $20 each. He can borrow $9 for a day, and then rush around showing the $10 he now has to those people, and tell them that he has almost made back the money he needs to pay them back, and he’ll pay them back next week for sure.
If he’s lucky, he might be able to make a little money from that $10 and add it to what he has after he gives the $9 back.
Will it work?
Sure. For a while.
{ 1 trackback }
{ 0 comments… add one now }