Monday, April 14, 2008

When policy-makers speak in an empty forest, do they make a sound?

This weekend we had a very fine illustration of an important truth: every word said by politicians and journalists is a lie more likely than not.

By all looks, it should have been very important: after all, G-7 summit itself spoke of potential currency intervention, asserted that it would not tolerate a weak dollar, and French Finance Minister Christine Lagarde even went as far as to call this a "turning point" and a major policy change.

Look, if this really was a policy change, and a turning point of some significance, then this is the kind of stuff which makes currency rates jump by 10% or more in day.

But in fact, after the announcement, dollar has done nothing but continue its usual fluctuations around the all-time low. This, of course, means that when politicians - even of the highest level - speak, no one thinks it is worth listening anymore.

Of course, the press either cannot comprehend or doesn't want to admit that market fluctuations are just that - random fluctuations. So, as usual, the press makes itself look clinically insane by simultaneously asserting that Dollar rebounds after G7 meeting and Dollar remains on backfoot after G7 meeting. Both articles are from the same newspaper (Forbes) and are published within 25 minutes of each other.

This whole farce underscores that the real reason for the credit crunch and liquidity problems is that lies and deceit are now in every part of the financial system. The reason Fed has been and remains so impotent in fighting the credit crunch, despite its unprecedented, almost trillion-dollar sized intervention, is that Fed's actions do nothing to restore the trust and honesty in the system. In fact, Fed's intervention has done nothing but help the banks further hide the truth. And as a result, it is doing nothing but prolong the crisis.