Apparently Central Bankers Haven’t Heard of Osmosis

Building on my last two posts that you can read here and here, we see that central bankers don’t know what osmosis is.  So I’ll do them a favor and quote it from Wikipedia:

Osmosis is the movement of water molecules across a partially-permeable membrane down a water potential gradient..[1] More specifically, it is the movement of water across a partially permeable membrane from an area of high water potential (low solute concentration) to an area of lower potential (high solute concentration). It is a physical process in which a solvent moves, without input of energy, across a semipermeable membrane (permeable to the solvent, but not the solute) separating two solutions of different concentrations.[2] Osmosis releases energy, and can be made to do work[3]. Osmosis is a passive process, like diffusion.

Now why is that important?  Simple.  Because I already outlined in my previous post that risk is neither created nor destroyed – it’s merely transferred.  Now, we hear this from the New York Times:

In an extraordinary meeting that lasted into the early hours of Monday morning, finance ministers from the European Union agreed on a deal that would provide $560 billion in new loans and $76 billion under an existing lending program to countries facing instability. Elena Salgado, the Spanish finance minister, who announced the deal, also said the International Monetary Fund was prepared to give up to $321 billion separately.

Officials were hoping the size of the program — a total of $957 billion — would signal a “shock and awe” commitment to such troubled countries as Greece, Portugal and Spain, in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008.

via E.U. Details $957 Billion Rescue Package – NYTimes.com.

Now I’ve heard that most of this is in the form of guarantees, which to me are about useful as a poopy-flavored lollipop.  The loans that are available could be used to roll the debt that these countries have at what I’m sure are concessionary rates, but what will that accomplish?  It simply masks that credit conditions in the Eurozone are getting worse, not better.  Call it a supra-sovereign Enron scheme, if you will.

The real piece that was needed in this mess wasn’t even provided by the EU.  It was provided by the other central banks.  From the Federal Reserve (emphasis mine):

In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets.

via FRB: Press Release–Federal Reserve, European Central Bank, Bank of Canada, Bank of England, and Swiss National Bank announce re-establishment of temporary U.S. dollar liquidity swap facilities–May 9, 2010.

This shows that the crisis has morphed beyond taking a stand on a sovereign debt issue.  This is now a currency and financial system issue with banks in Europe not wanting to fund counterparties in Euros.  That’s why my post on Euro Libor to dollar Libor spreads was key.  That’s the issue that needs to be focused and you can’t fix it by throwing Euros at the problem.  Nobody wants them.

But Japan did follow suit, which inspired me to write this haiku:

So there you have it…

This mess is now everyone’s mess because central bankers failed elementary school science.

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Filed under finance, government, International, macro, Markets, Monetary, Way Forward, You're kidding

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