Central banks cannot reverse a crisis anymore. A true, panic flight-to-safety crisis, a true liquidity crisis has, as recent events are increasingly demonstrating, no worthy opponent in central banks or national treasuries. The sums are simply too vast in this day and age to meaningfully shove markets or the economy this way or that for more than a few months. Those months are quickly running out for the United States.
In recent months, the Federal Reserve has set up several programs that aim to provide liquidity to segments of debt markets that fell apart last year. The government support is meant to be temporary -- and is aimed at reopening markets for debt issuers and coaxing back private buyers.
But there is a nagging fear for investors: The government can't support prices forever. The longer the government intervenes, the more investors will question its will to continue buying. Already, the wisdom of certain interventions is being questioned.
For now, the Fed shows no signs of backing off. This week, it said that five of its liquidity programs will now expire at the end of October, a six month extension.
At some point someone is going to have to break it to the American people and the world that there is no magic pill. It seems apparent that not even the likes of Helicopter Alan or Helicopter Ben possess the needed capital- even with the printing presses running wide open. Rewriting accounting rules to create the appearance of wealth, buying up nuclear waste at above fair value and trying to re-pump the beach ball of mortgage lending is wishful thinking. The sooner the current administration comes to grips with that, and starts resetting the impossibly high expectations they won the election with, the better. Painful? Yes. But less painful than the fall from grace that will accompany any other path.
The Fed's Market Footprint [The Wall Street Journal]