Jim Rogers tells it like it is here. He’s a man after my own heart who is up front. Asked about suspending market trading, he correctly said this would not help and in fact would defer an economic and market recovery. Jim summarized the official Fed and Treasury thinking as follows: “Nobody has liquidity. Nobody will lend any money. Nobody has any money.”
The official thinking is confused. And there are lots of people with the same idea, and so they are helpless in saying what is wrong with the Fed’s money pumping. The Fed has this argument, wrong though it is, that it is supplying the liquidity that the markets need. This argument could not be more wrong.

Liquidity is an effect, not a cause. Illiquidity is the effect of people who have money not wanting to lend that money. When they refuse to lend, then the credit markets lack liquidity.

People have plenty of money to transact. The money supply has not dropped at all in this whole episode. Wealth has dropped. Valuations have dropped. There is not less money. For every seller, there has been a buyer. Money changed hands. It did not disappear. The trades were at lower prices. Wealth disappeared. Assets were marked down in price.

It is correct to say that nobody has liquidity (meaning that many debt markets are not trading in much volume.) Stock markets of course are still trading high volumes and are liquid. It’s the debt markets that have become illiquid, and it’s not for lack of money. The money in t-bills and in money market funds is very large.

It’s right to say that nobody will lend any money. It’s 100% wrong to say that nobody has any money. They have money, and so they don’t need the Fed to add more money. They are not lending that money, and the Fed should not attempt to take their place and become a lender of first, last, or any resort.

The problem is CREDIT. It’s a simple fact (overlooked by all the officials that Rogers correctly calls “idiots”) that a lender will only lend to a borrower after assessing the credit-worthiness of the borrower. That is done, in part, by learning what the borrower’s assets and liabilities are. One of the biggest problems now is that the lenders cannot ascertain the actual values of the borrower’s assets and liabilities. The financial firms are carrying junk assets with unknown values. They are carrying liabilities in the form of insurance guarantees like credit default swaps that have unknown amounts and values. Nobody will lend to a borrower whom they are so unsure of. The market needs transparency. Bailouts make matters worse because they hold up the weak banks rather than letting them fail. The potential lenders have a harder time telling the good from the bad. Furthermore, banks are connected in many ways in loan markets. Keeping the bad ones alive and running only weakens the stronger ones that they are connected to. Lenders are then more afraid to lend to any of them, good or bad.

It is the job of the markets and investors to sort the bad from the good and the beautiful. It is the job of the markets to shift the capital that is there away from the incompetents to the competents. This is why bankruptcies should have been allowed to happen from the start. This is why the market dropped sharply on the bailout bill. I learned yesterday that when the bailout bill was first broached, the volatility index (VIX) immediately rose, and it rose again when the bill was passed. The market took it as a signal that the downside risk had just increased.

Officialdom has continually been making matters worse for months. My hat’s off to Jim Rogers for speaking so bluntly and accurately. We need more like him.