The perceived market's disappointment on Tuesday was the refusal by the Fed to make the Discount window more attractive. Now we know why they chose that course of action: Global Coordinated Liquidity Injection.Uh, ok... but what does all that mumbo jumbo really mean? In order to understand it, let's step back for a moment go way back in economics history...far, far away.... .
Some are calling today's coordinated move by global central banks unprecedented? Is it? Not really! But that doesn't mean it's not extraordinary. In fact, the extraordinary nature of it is.., why we say it's "bullish" but not bullish. These types of things just don't happen when times are good! To understand the present credit market conditions in context, let's go back to... Shhhhh... don't say this too loudly... 1930!
What happened in 1930? The formation of the Bank for International Settlements (BIS). The BIS essentially laid the groundwork for global coordinated liquidity facilitation. After the end of World War I there was a deep distrust among countries, which magnified the global credit contraction conditions. Debt was massive at that time. Global markets seized up.
The BIS was initially a failure. Among the first loans the bank intermediated were packages to Austria and Germany, neither of which helped those countries avoid financial crises. What is important is not that the BIS failed to stop financial crises, but why. The answer is that markets eventually chew through fiscal and monetary intervention in spite of us. So frequently, in fact, almost always, the cure is far worse than the disease. Just something to think about.
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