Tuesday, March 18, 2008

The Fed finally does what's needed

Atlast the Fed took the right bit of action. Expressing concern about inflation while not getting carried away by the market demand of a full monty cut. Also I believe the most critical action and in my opinion the correct action was the deftness it showed on the Bear Sterns issue, Fantastic!!! and adding onto this action is the fact that the Fed has opened its lending doors to Brokerage houses. This is what is really needed, the liquidity needs to go where it is needed and just blind rate cuts were never going to help. This action should have been taken long ago. Anyways as is true for everyone of us, it takes real adversity to tkae drastic actions.

However I still feel the Fed and more importantly the US government has to do more. I ultimately has to buy this mess (The mortgage backed securities). Hey I know the arguments against it and stop talking about moral hazzard, tax payers money and saving the rich. Let me give you a simple example----

You are driving on a Highway athigh speed and suddenly see some moron coming from a wrong direction. What would you do, sure that guy is an idiot and you feel like hitting him hard (Road Rage !!!) but would you do that, ofcourse not because it will hurt you aswell, so you just crib about it and give him way to get out. The same principle can be applied to the Fed and later on possibly the US govenment bailout. As for the tax payers money, well there would not be much left if this thing goes for long.

What required after these bailout packages and clearing the system is change in laws, increased vigilance. Like in our Higway example, had there been more vigilance the car would not have been allowed to enter the wrong way on the highway. The companies entering into any kind of derivatives transaction have to commit wafer thin margins. That has to change or if not change atleast it has to be made mandatory for the companies to report there equity against the derivatives position they are taking and the worst case scenario loss on equity (Not the Var crap, no more 95 percent confidence of this loss that loss etc. Keep these things limited to the MBA classes), The worst case scenario loss simple. No more fancy statistics just report how much maximum you can loose based upon there derivatives trade and then its upto the shareholders to decide whether to invest in such companies or not..........

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