This time Cassandra’s dark predictions are showing some of their truth in real time. One after the other, major players/abusers of the financial system join the defaulting league, saved by central bankers. The nature of the rescuers is not indifferent. It is not exactly the same thing to be bailed out by a government or a central bank. Governments can spend taxpayers’ money, something central bankers cannot do. They are limited to lending, a short term exercise nor adapted to structural failures, or creating money which -except to accompany growth- means adding a disease to a previous one. Governments, particularly when their respective deficits are already high, as it is the case today, can at best slow down a recession or speed up a recovery, not change the phase of the cycle. They certainly cannot at the same time also save the largest financial institutions from the inevitable consequences of their past mistakes.
Markets are indulging in wishful thinking for now, mixing up the willingness of central banks and governments to do their best with their actual capacity to do so. They also are blind to the nature of the recession, not understanding that what’s at stake is nothing but the real value of securities. How many Enrons are still undercover? How many torpedo stocks will appear when the lack of technological innovation shows its magnitude? How many bonds are waiting to be written off? Nobody knows and markets don’t want to know for the simple reason money has nowhere else to go. While lunatics build their fragile rafts in gold, silver and Swiss francs, assets will continue rallying until eyes open on the naked king.
This is how the world goes
