LIQUIDITY ROUNDUP. HELICOPTER BEN DELIVERS
[Latest Global Dollar Liquidity Measure: +13.4% annual growth rate; latest Endogenous Liquidity Index: -23.3%]

Helipcopter Ben delivers; a sharp rebound in our Endogenous Liquidity Index; predictable Bears; the Old Lady & Northern Rock.

[1] Helicopter Ben delivers — and then some. Good move by Bernanke & Co! (FOMC statement). Our Endogenous Liquidity Index registers its largest one-day upside move, spurred by sharp falls in CDS and bond spreads, and especially by the collapse in volatility indicators. Upward moves in market-based indicators of financial innovation (particulary the Goldman Sachs share price) also helped. Note, too, that the move by the FOMC marginally reduces the attractivenes of the carry trade, as the spread between U.S. and Japanese policy rates falls.

[2] Are there long-term credibility issues in terms of the Fed? Sure. That's the message conveyed by the dollar, commodity prices, and the steepening yield curve. Predictably —perhaps all too predictably— Marc Faber and Jim Rogers are already talking about the coming recession.

[3] To bail out, or not to bail out. Little by little, information on the Northern Rock saga becomes available. According to the Financial Times, the Bank of England "refused [to widen the types of collateral it would accept], arguing that this would promote moral hazard by protecting banks and their shareholders from the consequences of their risk-taking". Appropiately enough, the newspaper concludes that regulators "need to develop new measures and new tests" to capture liquidity risk.

[4] Accrued Interest's scenario. Interesting ideas from the fixed-income blogger: "I'd like to see the Fed follow the 1998 playbook. Cut 75-100bps to prevent the liquidity crisis from expanding. Let banks get back into a position to make new loans to good borrowers, be that individuals or corporations. Don't cut so much that the bad banks don't feel the pain, because we need the bad loans wrung out. Then when the market has made clear that it's strong enough to walk on its own, start hiking again".