Another Fed gift to Wall Street

By Bill Fleckenstein

Hours before the Federal Reserve announced its liquidity plan Wednesday, I wrote in my daily column on my Web site: "I suppose now the bulls will start chanting 'inter-meeting rate cut' or some other battle cry."

Little did I know how swiftly and dramatically their prayers would be answered.

Wednesday's party in the stock market -- at least for much of the day -- actually started the afternoon before, when, as several e-mails from my daily readers noted, a talking head on Bubblevision said the Fed was disappointed by the stock market's reaction to its quarter-point cut (that being the comment of a Fed governor who'd supposedly contacted him).

The Fed tends its flock

Then, shortly before the market's opening, the Fed announced its new term-auction-facility plan, whereby banks can borrow (pledging collateral to be determined) and receive funds at the prevailing rate that day. Thus, those who believe that markets should go up 1% or more a day -- but that the risks should be borne by the government -- won another round.

• Talk back: Does a recession loom?

We are where we are today because then-Fed Chairman Alan Greenspan's policies created a massive stock bubble that was bailed out by an even more massive real-estate bubble, and because of the deregulation of financial institutions, under which we saw the unsupervised renunciation of lending standards in this country. That process continued for several years, creating mortgage-related collateral that varied between marginally OK and totally worthless. (As to the "genius" responsible, I'll have more comments on the next page.)

That problem reared its head throughout 2007 but was deemed to be contained. Then we had a surprise rate cut. Then we had the "SIV Mae" bailout plan (SIV is short for structured investment vehicle). Then we had a couple of more planned rate cuts. Then we had Treasury chief Hank Paulson's mortgage-bailout nonplan plan. Then we had another rate cut. And Wednesday, we had the post-rate-cut liquidity vehicle.

It's beginning to look a lot like Christmas

That the Fed and the government are catering to Wall Street is obvious. They've created such a moral hazard that even if you could make an argument that, on the liquidity front, the Fed is simply attempting to do its original job, the way it is carrying out the mission is making matters worse.

I don't see how anyone could look at what happened Wednesday as anything other than the stock market pulling the Fed's chain and Chairman Bennie Bernanke responding by gassing up the helicopters.

• Video: Fed defends its liquidity plan

Stepping back to last Tuesday's stock-market rout: That response was understandable to me. It looked like those who believe in risk-free rewards had made such big bets that when the market didn't rally after the Federal Open Market Committee meeting, it tanked. (The whining it prompted was summed up nicely by Justin Mamis: "The audience really has become childish. . . . (So, naturally) the kid had a tantrum.")

While precious metals dropped last Tuesday, they didn't tank as hard because there, at least, folks have some respect for market action and don't assume that they get to win no matter what.

Bailout nation

In any case, I don't believe that this latest attempt at magic will work much better than the other ones. It won't change the problems of financial-asset insolvency. It will only delay the price-discovery process that is inevitable.

And I believe folks will ultimately see the sum of these bailouts for the panic-inspired fear that it is -- though for now, the bulls have concluded that nothing can hurt them and that higher stock prices are a given in this bailout nation that we have become.

Continued: 'Don't blame me'

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