In a last ditch attempt to breathe life into the dead patient before heading to the pub for a final hoorah, the world’s central banks yesterday announced huge liquidity injections in the form of loans to the national banks. The BBC used the word “unprecedented” in its evening news reports, and carried a comment from an “expert,” who explained they were just adding “some oil to the engine.” The inflationary effect of this move is already being felt, as oil jumped back above the $94 per barrel mark.

Back in June, when lenders seized and tried to sell collateral from two failed Bear Stearns hedge funds, it was quickly discovered that the collateral could be sold for nowhere near the value the funds carried the assets at on their books, with buyers offering a reported 30-50 cents on the dollar. The lenders were forced to cancel the sales, not because of the losses they would take on the transactions, but because of the impact on the market as a whole of such an action.

The central banks’ actions today are designed to prevent such sales on a far wider scale. It is market confidence that the banks are trying to prop up. “Sentiment has been deteriorating fast in the global financial markets,” a source told Reuters. “This operation is less about liquidity and more an attempt to restore confidence.”

Speaking of confidence, I was chatting to some colleagues yesterday evening, one from New York. He commented on the behaviour of investors in the US, who, despite the clearly collapsing economy over there, continue to behave like nothing is happening. The stock US indices continue to climb. It occurred to me that its all very reminiscent of the over confidence of dot com investors just before the bubble popped.

Of course, there are so many bubbles in the process of popping right now that will make dot com seem like a gentle stroll in the park, and I really wonder if anyone is really dumb enough to believe that the central bank move will have any positive effect whatsoever.

The longer this goes on, the harder it’s going to be. We need to recognise that the patient is indeed dead, and that the only way out of this mess is through a new Bretton Woods style economic summit, and a new financial system.

Without the nutters that have run the system in the last 40 years or so.

This entry was posted on Thursday, December 13th, 2007 at 2:03 am and is filed under Economy, Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.