Painless pain

W. C. Handy once claimed that the inspiration of his song “Loveless Love” was a preacher who repeatedly used a similar trope—“milkless milk,” “silkless silk”—in sermons. If Handy were around today to listen to the financial community, he might add “painless pain,” for it seems that everyone readily admits that market corrections necessarily involve pain, but nobody seemingly wants to endure it.

Last week’s repurchase transactions by the Federal Reserve added instant liquidity to the financial system, helping to settle the system’s upset stomach, but the lingering question remains: “Was it necessary, or even prudent?”

I’m no economist or banker (much less a central banker), but I have my doubts regarding the wisdom of Friday’s intervention. The repurchase transaction is such a distant galaxy in the financial universe, I can’t even understand the risks involved in the government holding mortgage-backed securities as collateral for the $38 billion doled out to the banks. Granted, there’s (purportedly) only a one-week holding period until the Fed swaps those securities back out for cash, but presumably, if things were to go from bad to worse for the banks, the Fed would simply repeat the transaction for as long as it deems necessary, which puts a shit-load of liquidity into the marketplace for an extended period of time (while holding paper with unstable value), and well, call me a rube, but that sounds an awful lot like a bailout.

Here’s Johnny Paycheck’s synopsis of the situation: “OK, so let me get this straight…some guys lend a bunch of money to people who can’t pay their bills, convert the loans into paper, sell it off to other financial institutions (including my pension fund), and as debtor after debtor defaults on their loan payments, the banks suddenly have no money because they can’t figure out how (stomach? chest? neck?) deep in shit they’re standing?”

p.s. A free Divagator tee-shirt goes to the first person who can identify the real RCA-Victor 27856-A.