Thursday, August 9, 2007

European Central Bank Bailout for US Housing Bubble

European Central Bank Throws Gasoline on the Liquidity Fire

The European Central Bank (ECB) injected 95 billion Euros ($131 billion) at low 4% interest rates in response to a $2.2 billion suspension crisis at France's largest bank, BNP Paribas SA, which is suffering from an inability to fairly value its US subprime mortgage securities.

Loose credit caused the subprime mortgage mess of bad housing bubble loans making some mortgage securities worthless, so the ECB's bailout repeats the causes of the problem, extends the problem, and magnifies the problem by telling lenders, borrowers, and investors to continue to make stupid decisions because the government will bail you out at the expense of others (i.e. creates moral hazard).

Governments' indecisive bailout policy creates uncertainty and impairs our rational decision-making ability.

The US Federal Reserve added $24 billion of liquidity even though its recent Federal Open Market Committee (FOMC) decision not to cut the federal funds target rate was a refusal to add liquidity.

The bailout attempts reignite the loose monetary policy (over-liquidity) problem, increase moral hazard, send confusing mixed signals to markets, and could backfire by creating a panic.

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