The Thought of Chairman Liu

The way the Fed has been trying to stabilize the financial market in this horrendous credit crisis since it burst open in August 2007 is looking like punching new gaping holes in the throat of the patient to deliver more air to his lungs. One of these days, it may accidentally puncture a jugular vein to end the game. The lender of last resort has become a predator of last resort, nationalizing all dying enterprises. But it seems to be racing headlong onto the road of nationalization not so much as to help the common people as to keep dying financial dinosaurs alive.

The Fed continues to pretend that firms likes AIG are merely going through a liquidity crunch. The fact is that undercapitalization is by definition a solvency problem. The problem is not that good assets are temporarily hit with prices below their real worth and that new capital is needed to maintain debt to equity ratio. The problem is that all these debts were not worth their face value to begin with. The high inflated market values of these assets were held up by circular trading of debt by assuming that they could always be sold at still higher prices way beyond their true worth. Now that the market is finally adjusting the price bubble downward and a lot of firm who were incredibly profitable on the way up are falling like leave in autumn in a bear market. The Fed is merely trying to inject money to keep prices not supported by fundamentals from falling. It is a prescription for hyperinflation. The only way to keep price of worthless assets high is to lower the value of money. And that appears to be the Fed unspoken strategy.

AIG is faced with $441 billion of exposure to credit-default swaps and other derivatives. Losses on these contracts have driven AIG into a vicious downwards spiral in which it needs ever more cash to remain a top-rated counterparty. JPMorgan Chase and Goldman Sachs had been charged by the government with finding $75 billion from private sources to rescue failing firm. They both failed. The shares of Morgan Stanley and Goldman Sachs themselves were down sharply one day after the Fed issue an $85 billion bridge loan to keep AIG from defaulting.