–Yet central banks faced with deflating asset prices bubbles and illiquidity in inter-bank lending markets can’t just sit around and do nothing, now can they? But when lowering short term interest rates no longer has the effect of adding liquidity to the system, what can you do? That’s where quantitative easing comes in.

–The Bank of Japan engaged in quantitative easing to try and inflate Japan out of its decade-long deflationary spiral. It worked, sort of (although the results aren’t really in yet.) Could the Fed do the same thing and what would the consequences be?

–First off, the Fed funds target rate is 2.25% and the discount rate 2.50%. So we still have 225 basis points to until zero. But trouble in the credit market persists.

–Remember that Primary Dealer Credit Facility (PDCF) the Fed set up for Wall Street investment banks to borrow from? Who could forget it really? In the week ended April 23, borrowing from that cash take-out window averaged $US10.73 billion…per day. No wonder financial stocks had a good week on Wall Street

–And what about the Term Securities Lending Facility? Remember that one? That’s where primary dealers can exchange dodgy mortgage-backed debt for the Fed’s not-so-inexhaustible supply of U.S. Treasuries for fixed periods determined at an auction. Total borrowings from that Facility are just under $US160 billion. The Fed offered another $75billion in Treasuries this week. $59 billion worth were scooped up.

–How is the Fed’s supply of Treasuries holding out? It’s got about $548 billion to go. Will this be enough to sustain financial institutions that keep reporting surprise losses? Hmmn.

–In quantitative easing, the Fed would target longer-term interest rates by abandoning its clever pretence and simply printing brand new money to buy bonds and bank assets. This is a bare-knuckled banking attempt to restore “liquidity” to the financial system. Despite the Fed’s best efforts, this is still evidence that the credit markets aren’t quite right. There was a spike in the over-night rate banks charge each other to borrow (LIBOR) late last week.

–Our point? The credit crisis is still very much alive and unwell. It’s just going on behind closed doors. This gives the stock market the cover to behave as if everything is okay. We report. You decide.

–By the way, it’s obvious that further rate cuts by the Fed and quantitative easing would be unwelcome by central bankers in Europe, who rightly fear inflation more than deflating asset prices. Dollar rallies should be viewed with deep scepticism. But even the greenback will get a break every now and then. Traders in gold are taking profits…and probably waiting for the next wave of the crisis to break. It will.

–Speaking of which, new home sales fell to 17-year lows in America. The decline of 8.7% from the month before was worse than expected. But the truly disappointing news is that median prices for new homes fell 13.3%, the biggest decline in 40 years. And get this, sales were 36% lower than March of last year.

–Ouch. The lower price is good news in the sense that we’re closer to a “clearing price” at which some new buyers would begin thinking of getting back in the market (if they can get a mortgage from the newly-stingy banks). But with inventories of homes sufficient to last 11 months at the current rate of sales, sellers still outweigh buyers by a lot.

–The worry now is that declining median prices for new and existing homes drag more mortgage holders under water. That is, folks who are making their mortgage payments just fine right now may nevertheless see the value of their asset dipping below the value of the mortgage. What will they do then?

–While America’s housing-based economy slowly dis-integrates, we have the strange spectacle of Chinese students being bussed to Canberra to drown out and obscure pro-Tibet protestors at the Olympic torch relay. One Empire falls away into disrepair. Another one rises.

–This whole torch relay has become a bit of farce, hasn’t it? But we admit it’s an entertaining one. Did anyone really think that Chinese people would enjoy having their government and their games bashed by the foreign press in a systematic fashion as the torch makes its way around the globe? They are reacting in exactly the way you would expect of a nation whose pride has been insulted, with anger.

–This offended national pride is irrational and thus very common. When we trotted around the globe in 2003 doing research for our book the Bull Hunter, we found that every where they went, people were proud of where they came from. Most thought that there country was the greatest country in the world. France, England, Japan, India, China and of course America…every one of them has a myth of national greatness that makes people stubbornly and stupidly defensive of their moronic national politicians. What a fraud.

–Just why people confuse the goodness of a people with the greatness of national government is a mystery. Perhaps it’s simply a tribal pride thing. Governments shamelessly manipulate this sense of wanting to belong to something greater. And so the Chinese are notifying the world that not only are the Olympics the achievement of a great nation and a great people, but you had better respect that. There’s no “or else,” at least not yet.

–Australians, to their great credit, do not seem to engage in this national greatness kind of chest thumping. Even today, on ANZAC day, we note as an outsider that it’s seems less like a celebration of abstract patriotic national values and more like a celebration of the sacrifices people make for one another when they are swept up in events over which they have no control. At least that’s how are choosing to interpret it.

–”China told to shelve mine deals,” reports Jennifer Hewitt in today’s Australian. That’s interesting. “At least 10 Chinese companies have withdrawn foreign investment applications to buy into Australian resources companies after pressure from the Rudd Government. The Government has in recent weeks made it plain privately that it wants more time to consider the issue of the national interest in terms of ownership of the Australian resources industry.”

–Resource nationalisation happens, even in free markets. Will it happen in Australia? Well, the resources aren’t much good to the national economy if you don’t create jobs to mine and produce them so you can sell them for export income. But perhaps the Rudd government has a point it would like to make about the emerging character of the Chinese-Australian relationship. We have no idea what that point would be. But, “back off” would appear to be part of it.