LIQUIDITY NEWS. WILD RUMORS, WEAK DOLLAR
[Latest Global Dollar Liquidity measure: +11.3% annual growth rate; latest Endogenous Liquidity Index: -50.6%]
There are all sorts of rumors out there about hedge funds, and even about some big financial institution going under. The liquidity crisis, apparently, is fast becoming a ... solvency crisis! Here's my two cents on the rumors: I don't believe them. I trully think that the new market-based, securitization-driven financial market has succeeded in diversifying credit risk. Of course, we are only now becoming aware of the phenomenal downside: a spectacular information crunch, whereby nodody really knows the extent of the damage sustained by one's credit counterparties.
Overall, the Fed's liquidity operations are well designed. But perhaps Mr. Bernanke should be more explicit about his goal: to solve the liquidity puzzle while not giving the impression that he stamps his signature on mere American ... pesos.