The Oil Drum: Canada

CR,

I'm thinking there's more going on behind the scenes than in full view. In Curve Watchin', Mish explains how the funds rate has effectively been allowed to slip some 0.5% recently. Today, out in the open, it's the discount window. The only thing they haven't got the guts for yet is the interest rate itself.

It all smells of despair to me, both the Fed actions (they also pumped in $6 billion more this morning), and the market reactions to them. But all that money and easy credit so far just evaporates like water on a red hot plate.

There are a lot of parties, especially hedge funds, that are frantically scrambling for cash to keep their operations alive. But the easy credit that they need to survive is no longer there, and no 0.5% discount cuts or $6 billion can fix that. These things just provide temporary life support, not a cure.

What I wrote above, I think, illustrates all that best. Countrywide will go bankrupt, in essence, over 1% of its mortgages defaulting. The reason for that is, largely, the extent to which they have leveraged their positions. That same extent of leverage is written all over the hedge fund industry. They need cheap credit to pay off the interest on their existing credit, or they're dead. Well, there is no cheap money anymore. The final nail probably is the surging yen.

NB: the Fed's actions will have ONE lasting effect: they will hurt the US dollar for a long time to come. Point in case: Canadian dollar rallies on Fed discount rate cut. If the Fed does what the big boys want, the rate cuts, they risk losing a lot of value in the US dollar.