The Even Larger Bailout

Yesterday I pointed out the US financial crisis has gone global. Overnight the response has been a joint counter-attack from the world's central banks...to the tune of nearly one-quarter of a trillion dollars.

The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the 1920s.

The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England, the Bank of Canada and the Swiss National Bank also participated.

Policy makers have struggled to revive confidence in markets this week as investors stockpiled money on concern more financial institutions would fail after the bankruptcy of Lehman Brothers Holdings Inc. and the U.S. government bailout of American International Group Inc. The cost to hedge against losses on U.S. government debt climbed to a record yesterday.

``There's a complete lack of faith in the markets,'' said Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London. ``There's a lot of cash hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act.''

Markets welcomed the announcement, which was made in statements from each central bank at 9 a.m. Frankfurt time at the start of European trading. The cost of borrowing dollars overnight slid to 3.84 percent from 5.03 percent yesterday. It was 2.15 percent last week and reached the highest since 2001 on Sept. 15.

That's right, the world's central banks with the Fed leading the way are throwing almost $250 billion at the problem. As I said, the last card the Fed has to play is hyper-inflation, creating massive amounts of money to keep the global economic engine from seizing up. They are doing this now, as are many central banks. They have nothing else they can do now.

So far Asian markets are mixed, European ones are up modestly, and US markets are set to open a bit higher. But keep in mind it took an unprecedented amount of global fiat money this week -- almost four hundred billion dollars -- to stanch the bleeding today.

And nothing has been done to deal with the underlying problems. We're still deep in a housing depression. Plenty of banks are facing toxic balance sheets, now even more toxic after the last three days. Washington Mutual and Morgan Stanley are on the blocks now looking for buyers, and they certainly won't be the last financials to go.

Once again the Bush Administration will try to declare the crisis over and everything is now fine, the "fundamentals of our economy are strong."

They are not strong. We're living in a house of cards built on sand...sand owned by China and Saudi Arabia. Our capitalist society has become socialist overnight. Everything the Fed has done up until now has failed to stop the problem long term.

Every single action the Fed and Treasury has taken over the last two years HAS ULTIMATELY FAILED. Remember that. Each Fed response has only bought time until the next breaking point where even more Fed action is necessary.

This action will fail as well. The only thing that will change is the magnitude of the next phase of the crisis and the magnitude of the response to it, and the magnitude of the disaster when the Fed ultimately runs out of responses. That time is almost upon us.

They are down to their last option right now.