By the way the Fed issued this statement just this morning: The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.
The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.
The Fed statement today shows there are unusual funding needs. How enlightening. But here are a few things to remember about those funding needs.
* The Fed and ECB can provide liquidity support but not capital.
* That liquidity is primarily needed for prior obligations and prior commitments. As a result you can kiss future growth of IPOs, stock buybacks funded by debt, and mergers and acquisitions, goodbye.
* There is little desire anywhere (globally) to take on more debt or excessive risk.
* As asset prices sink the ability to pay back existing loans is going to get harder and harder.
* Bankruptcies and foreclosures will continue to soar. That's what happens in a liquidity crunch.
* Expect to see lots more hedge funds and lenders blow up too, and not just in the US.
The liquidity crunch is now globally contained.
One last thing: By providing emergency liquidity all the Fed is really doing is defending an interest rate target. It was the Fed defending interest rate targets way back when (say all the way down to 1%) that helped create this mess. If defending interest rate targets is the problem (and it indeed is) then defending interest rate targets cannot be the solution. It's time to abolish the Fed.