August 12 (LPAC)--After $325 billion in two days of unprecedented money-printing by central banks trying to prevent a complete banking and credit collapse, financial media on Aug. 12 are full of demands for the next step in the panic--emergency cuts in short-term interest rates by the Federal Reserve and European central banks. The London Times, for example, urged that emergency rate cuts were made immediately after 9/11, and claimed that interest-rate futures on Wall Street and City of London markets had "already priced in" an immediate quarter-point rate cut to 5% by the Fed. The implication was that a bigger cut than that would be necessary to stem the bank credit panic. The Times described Fed Chairman Ben Bernanke as "under mounting pressure to cut American interest rates ... this week." New York financial analyst Ed Yardeni was widely quoted claiming the Fed had to cut rates now, and citing the example of emergency rate cuts the 1998 Russian GKO bond default/LTCM hedge fund crisis.
The brilliant idea of this, is simply to "give hedge fund operators and other holders of risky securities the chance to sell them, which they are having trouble doing during the current panic," noted the Scottish daily The Scotsman on Aug. 12.
But this will simply unleash the "other bookend" of the banking crisis driven by the U.S. mortgage meltdown; namely, the "unwinding" of the so-called yen carry trade. What happened after the LTCM collapse and the emergency rate cuts in 1998, was a rapid unwinding of that $500 billion-or-so carry trade which, today, has again been pumping free liquidity into world speculative bubbles at incredible rates. Within two months of those events in 1998, the U.S. dollar had plunged by 20% in value.
The same results would follow emergency rate cuts now, in a far, far worse credit collapse than what threatened in 1998--in fact, the bubbles of household and corporate debt, built up since 2001, are so large, that no emergency rate cuts can stop the collapse. What they could do, is suddenly bring down one huge liquidity pump--the yen carry trade--even while trying to open wider the other, that of the Federal Reserve.
Lyndon LaRouche's description Aug. 9 of the Congressional demands to force China to raise the value of its currency, applies just as well to Wall Street's demands for emergency rate cuts--"an attempt to unleash a new financial crisis, within a financial collapse! Insane!" said LaRouche.
Closely to be watched in this crisis, is the Bank of England, which alone among major central banks, has issued no new bank credit. Britain's pound Sterling inter-bank lending rate has stayed at 6.75% even as the European Central Bank was fighting to bring it down to 4%. BoE Governor Mervyn King made comments about the need for a "risk repricing" on Aug. 8, which may have helped trigger the next morning's panic.
