The Thought of Chairman Liu

The market was more honest than most paid pundits and special interest policymakers. Market participants knew the crisis was not merely a passing liquidity crunch, but a widespread insolvency created by excessive asset value unsupported by compensatory revenue. Insolvency will translate into sharp declines in asset price. The government can destroy the market in the name of saving it but the laws of market cannot be negated by government intervention.

The recent opening of the Federal Reserve discount window to borrowings by commercial banks, collateralized by illiquid assets, and the extension of discount window access to investment banks have pushed the central bank across the line of being a lender of last resort to being a market destroyer. It is no wonder that its liquidity injection moves have failed to moderate seizure of global credit markets. This is because the central bank, not constrained by the supply and market value of money, can set the price of illiquid asset by fiat, thus destroy the very function of the market in setting meaningful prices that can defuse market seizure. Central bank intervention into credit markets to artificially support asset prices above market levels carries no fundamental market implication, save the impact of future inflation. The market knows that asset prices assigned by the central bank are not real and will be adjusted downward as soon as central bank intervention ends. And until central bank intervention ends, the market remains in suspension.