MERCATO LIBERO

Questo autorevole articolo apre la porta a scenari catastrofici sull'economia del mondo occidentale.


The Federal Reserve's rescue has failed
By Ambrose Evans-Pritchard, International Business Editor

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.

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.

It is hard to imagine a more plain-vanilla outfit than the Port Authority of New
York and New Jersey, which manages bridges, bus terminals, and airports.

The authority is a public body, backed by the two states. Yet it had to pay 20pc
rates in February after the near closure of the $330bn (GBP166m) "term-auction"
market. It had originally expected to pay 4.3pc, but that was aeons ago in
financial time.

"I never thought I would see anything like this in my life," said James Steele,
an HSBC economist in New York.

No sane mortal needs to know what term-auction means, except that it too became
a tool of the US credit alchemists. Banks briefly used the market as laboratory
for conjuring long-term loans at Alan Greenspan's giveaway short-term rates. It
has come unstuck. Next in line is the $45trillion derivatives market for credit
default swaps (CDS).

Last week, the spreads on high-yield US bonds vaulted to 718 basis points. The
iTraxx Crossover index measuring corporate default risk in Europe smashed the
600 barrier. We are now far beyond the August spike.

Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007
fell to a record 12.72pc of face value on Friday. The BBB tier fetched 10.42pc.
The "toxic" tranches are worthless.

Why won't it end? Because US house prices are in free fall. The Case-Shiller
index for the 20 biggest cities dropped 9.1pc year-on-year in December. The
annualised rate of fall was 18pc in the fourth quarter, and gathering speed.

The UK hedge fund Peloton Partners misjudged this fresh leg of the crunch. After
an 87pc profit last year betting against sub-prime, it switched sides to play
the rebound. Last week it had to liquidate a $2bn fund.

Like many, Peloton thought Fed rate cuts from 5.25pc to 3pc (with more to come)
would end the panic. But this is not a normal downturn, subject to normal
recovery. Leverage is too extreme. Bank capital is too eroded. Monetary traction
eludes the Fed. An "Austrian" purge is under way.

UBS says the cost of the credit debacle will reach $600bn. "Leveraged risk is a
cancer in this market."

Try $1trillion, says New York professor Nouriel Roubin. Contagion is moving up
the ladder to prime mortgages, commercial property, home equity loans, car
loans, credit cards and student loans. We have not even begun Wave Two: the
British, Club Med, East European, and Antipodean house busts.

As the once unthinkable unfolds, the leaders of global finance dither. The
Europeans are frozen in the headlights: trembling before a false inflation;
cowed by an atavistic Bundesbank; waiting passively for the Atlantic storm to
hit.

Half the eurozone is grinding to a halt. Italy is slipping into recession.
Property prices are flat or falling in Ireland, Spain, France, southern Italy
and now Germany. French consumer moral is the lowest in 20 years.

The euro fetches $1.52 (from $0.82 in 2000), beyond the pain threshold for
aircraft, cars, luxury goods and textiles. The manufacturing base of southern
Europe is largely below water. As Le Figaro wrote last week, the survival of
monetary union is in doubt. Yet still, the ECB waits; still the German-bloc
governors breathe fire about inflation.

The Fed is now singing from a different hymn book, warning of the "possibility
of some very unfavourable outcomes". Inflation is not one of them.

"There probably will be some bank failures," said Ben Bernanke. He knows
perfectly well that the US price spike is a bogus scare, the tail-end of a food
and fuel shock.

"I expect inflation to come down. I don't think we're anywhere near the
situation in the 1970s," he told Congress.

Indeed not. Real wages are being squeezed. Oil and "Ags" are acting as a tax.
December unemployment jumped at the fastest rate in a quarter century.

The greater risk is slump, says Princetown Professor Paul Krugman. "The Fed is
studying the Japanese experience with zero rates very closely. The problem is
that if they want to cut rates as aggressively as they did in the early 1990s
and 2001, they have to go below zero."

This means "quantitative easing" as it was called in Japan. As Ben Bernanke
spelled out in November 2002, the Fed can inject money by purchasing great
chunks of the bond market.

Section 13 of the Federal Reserve Act allows the bank - in "exigent
circumstances" - to lend money to anybody, and take upon itself the credit risk.
It has not done so since the 1930s.

Ultimately the big guns have the means to stop descent into an economic Ice Age.
But will they act in time?

"We are becoming increasingly concerned that the authorities in the world do not
get it," said Bernard Connolly, global strategist at Banque AIG.

"The extent of de-leveraging involves a wholesale destruction of credit. The
risk is that the 'shadow banking system' completely collapses," he said.

For the first time since this Greek tragedy began, I am now really frightened.

ARTICOLO DA FAR GELARE IL SANGUE...