28 Jan Pseudo-Fed: Bury your Head

Just a few days ago, the Board of Governors of the Federal Reserve pumped enough cash into the US economy to lower interest rates by 75 basis points. For the average American citizen, who would be hard pressed to define what a basis point means, this most recent Fed action is at best meaningless. To the vast majority of bankers on and around Wall Street, the very same people who brought us to the edge of the abyss like cattle to a slaughterhouse, chances are this move will be interpreted as what it is not: a lifeline. It’s a line alright, but one coiled into a noose sufficiently large to accommodate the neck of the American people.

One basis point may be small, but multiplied by $13 Trillion (the current size of the US economy), it can add up to significant figures. A billion bucks is not something that can easily be conceived. If you gave an infant a billion in $100 bills, he would not live long enough to count them. $100 billion is not something one can even imagine, let alone count. As one US Senator once said “a billion here, a billion there, pretty soon you’re talking real money.”

It’s not so much that Chairman Bernanke’s bold but reckless move will be misunderstood, for to misunderstand something, you first have to understand it. Besides being mismanagement on a monumental scale, it is a step in the wrong direction, a faux-pas Alan Greenspan would never have taken. How do we know that? Simply because the Russian debt crisis, nowhere near as large as this one but quite similar in its import and breadth of culpability, was handled with brio and aplomb and was nipped in the bud long before it snowballed into a crisis. This rate cut is nothing but one more bottle of Jack Daniels given to an alcoholic upon the promise that this would be ‘the last one’. Ladies and gentlemen, the party hasn’t even started yet; we’re just buying the booze.

This crisis is not a liquidity crisis, whereby Value is mysteriously locked up in healthy but illiquid structures, and someone simply needs to enable such pre-established Value to be ‘liberated’ via cash infusion. For if that were the case the Federal Reserve, the liquidity management tool par excellence for the United States banking system, could indeed deliver us from evil in the name of irresponsibility. In other words, if this amounted to a transitory pricing aberration, all would be well once the normal insanity subsided. There is no such thing as a liquidity crisis, for that is impossible. There is a valuation crisis. This is not finance 101; this is finance 001.

Thanks to the Fed’s move, for the foreseeable future American finance is burying its head in the sand, hoping that some day a genie in a bottle of gin will save us from ourselves. Speaking of head in the sand, we would like to introduce a very appropriate game, entitled “The Ostrich Syndrome”. It was created by Peik Looi Ong, a former Baruch College Masters student in the Program in Applied Finance under the adroit leadership of Professor Dan Stefanica. Peik Looi developed this game as a model of infectious corporate greed in highly correlated environments. We hope you will agree that the results are impressive and revealing.

Some of you may know that ostriches have the strange and nasty tendency to commit suicide upon encountering a dead ostrich on their path. This phenomenon is also the way cancer grows inside human bodies, i.e. one cell at a time. We believe this to be an apt analogy given the current Zeitgeist. We hope you enjoy watching this tragedy unfold in real time; and you can even choose your own parameter-set to make this game more to your liking.

Regardless of what the Fed’s mignons might believe, this mess has nothing to do with liquidity but with an obvious inability to conceptualize Value in the primary, not the secondary structured markets. Our predicament has nothing to do with Price, but everything to do with Value and the two, by the way, are incommensurate. Cash moves for Value, not the other way around. Until this is understood, American finance will wallow in an ocean of denial and wander aimlessly in a metaphysical waste land characterized by fear, which is where we are today. Everybody wants to go to heaven, but nobody wants to die.

Only a God can save us now!