Column Is America Fed up?

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It doesn’t seem like a week goes by without some major piece of the US financial system falling off or some radical new step by the US financial authorities to forestall an incipient crisis. In this week’s column, I would like to assess what the latest moves by the US Federal Reserve mean for Indian investors. But before I do that, I want to reiterate the recommendation I gave you on May 26, and have repeated a few times since. Stay away from global equities. I know it’s emotionally difficult for equity investors, so I shall repeat it. Stay away. Hold your nerve. Wait. Those who have followed this advice have profited. The day you should go back into global stocks is approaching, but it is not this day. Recent events in the US reinforce that message.

Two weeks ago, the Fed was rescuing “Fannie Mae” and “Freddie Mac”, the quasi government agencies that finance around half of the $12 trillion housing stock. Last week, the Federal Reserve announced that it was extending its emergency lending programmes to Wall Street firms until January 30, 2009, auctioning longer term cash to commercial banks and expanding its programme of swapping tainted securities held by securities firms for government bonds. This announcement is a clear indication that the Fed does not see an early end to the liquidity crunch. It is also a validation of the idea that modern banking in the US and Europe now means that central banks are no longer just lenders of last resort, they have also become “buyers of last resort”—buying up the diseased assets of sickly institutions.