Monday, March 17, 2008

Money is cheap and unavailable

Last week, in a post on the dollar and expected Fed moves on interest rates, we included a link to a recent Wall Street Journal interview with investor Wilbur Ross.

I mention this because Ross said something interesting during this interview about the availability of money and credit in recent weeks. Ross noted that we are currently in a period of very tight liquidity, and that money, while cheap, is practically unavailable.

This is an odd situation, because as Ross notes, "usually when money is cheap, it's also very plentiful". Today, this is not the case. Ross continues, "Now, it's cheap, except you can't get it".

This leaves me with a few questions to ponder over.

What's behind this tightening of money and credit? Why is money priced cheaply if you can't get your hands on a loan? Is money and credit artificially cheap? Has the Fed set short term interest rates at an artificially low level, thereby distorting the market for money and credit?

Also, how do these things factor into the ongoing credit crunch? Will cutting interest rates further do anything to solve the situation, or will this simply make things worse?

For now, one thing is certain. The rapid demise (and ensuing bargain sale) of investment bank Bear Stearns has got everyone's attention. Talk of a systemic financial crisis, which until very recently was the exclusive domain of "permabears" and "doomsayers", is now widely discussed in mainstream press.

"Citing a worsening “credit pandemic,” economists predicted the Fed would take more aggressive action tomorrow by slashing its benchmark rate by another full point - or even more.

“We are in the midst of the most pervasive financial crisis in a generation, which has destroyed untold sums of wealth in housing and financial assets and has driven the U.S. economy into recession,” said Sherry Cooper, chief economist at BMO Capital Markets."

Keep a sharp lookout. Rough seas ahead.