JUNE 24, 2009, FRANKFURT -- The European Central Bank pumped a record €442 billion ($662 billion) into euro-zone money markets Wednesday ... as it continues battling the Continent's deep recession. (The Wall Street Journal)
Financial bureaucrats the world over remain convinced they are in control. Never mind the fact that as they lowered interest rates and “injected liquidity” over and over since late 2007, stocks kept falling, credit markets remained frozen and global economies stalled as deflation spread.
The excerpt you can read below explains just who is really in control and why the governments' previous efforts have failed so badly. It's a quote from the December 2007 Elliott Wave Theorist, which remains a most relevant read: It was published by EWI’s founder and president Robert Prechter after the central bankers’ first major (and failed) rescue attempt in late 2007.
As you read this, please keep in mind that at the time, U.S. and European stocks were still trading near their all-time highs, the global economy was yet to crumble, and the investors' belief in the powers of central bankers was still unshaken.
Robert Prechter
December 2007 Elliott Wave Theorist, excerpt
The world’s “big five” central banks -- the Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank -- have just made ... a plan to bolster confidence among the world’s creditors and borrowers. The Wall Street Journal (12/13) calls it “the biggest coordinated show of international financial force since Sept. 11, 2001” [that] would provide billions of dollars worth of “liquidity” in the form of low-cost, one-month loans to qualified banks [in] a drive to create more inflation.
[T]his is probably the single most important central-bank pronouncement yet. But it is not significant for the reasons people think. [T]he tremendous significance of this seismic engagement of the monetary jawbone is that if this announcement fails to restore confidence, central bankers’ credibility will evaporate.
At least that’s the way historians will play it. But of course, the true causality, as elucidated by socionomics*, is that an evaporation of confidence will make the central bankers’ plans fail. The outcome is predicated on psychology. If wave c of the bear market has begun, nothing the Fed does will engender confidence. On the contrary, everything it does will be interpreted, in the trend toward negative social mood, as something bad. The Fed’s failures will not create fear; fear will create the Fed’s failures. You can’t tell the market what you will or won’t accept. It tells you. Good luck changing the mood of the crowd.
[T]oday’s central banks are many multiples bigger than the biggest banks of 1929, and they have unlimited credit and no real-money standard. They are nothing less than super-banks, which can create credit from nothing; all a customer has to do is ask for it. Ah, but that’s the problem. Someone has to ask. The expansion of credit depends on willing and able borrowers.
The root of today’s systemic dilemma is not mechanical, as the monetary engineers believe, but psychological. Bernanke thinks he can pull switches to prevent deflation. But you can’t pull switches on a crowd. It pulls switches on you. When the Fed’s credibility withers in the environment of a bear market, the monster will have overpowered his makers, and the gunfight will be over.
When global stocks fell to lows unseen in years back in March, “the gunfight” clearly ended in favor of the bear market psychology which had shredded ALL central banker efforts. So, does this mean that they shouldn’t even try?
Well, as the old saying goes, there is a time to throw stones and a time to gather them. Government interventions only work when they are aligned with the mood of the crowd. The previous rescue attempts got trumped by fear. But the rallies in global stocks since March show that investors’ collective mood is rebounding; fear is receding.
Because of that, the timing of the ECB's latest "liquidity injection" could turn out to be quite good. Call it luck -- because it’s exactly what it would be. However, as the June issue of EWI's European Financial Forecast (published on May 29) warned, there is a reason why for European stocks, "upside potential is limited and a sizable move lower should begin soon." Get the complete analysis and forecasts now, risk-free.
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*Socionomics is a new science of social prediction. The latest forecasts in the Socionomics Institute's monthly Socionomist explain the timing of the swine flu outbreak; how environmentalism rises and falls with commodities; what it takes for a restaurant to succeed in a bear market; and more. Details.