A late rally ensured a higher close in the stock indexes (Aug. 22).
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How crazy have things become? Good question. Let's see if I can give a one-sentence answer.
The Federal Reserve today loaned two billion dollars to four large banks which claimed they didn't need the loan but took it anyway, in order to "restore confidence" in a financial system beset by a crisis of overborrowing.
In case all that is too much for one sentence, try this:
Too many lenders made too many stupid loans. This made a big mess. So, a few big banks borrowed some money today from the biggest bank of all. Now they hope we'll stop worrying about all the stupid loans and the big mess.
Both versions of the answer refer to the same piece of news, namely today's joint announcement by four large U.S. banks that they have each borrowed $500 million from the discount window of the Federal Reserve. The Fed's website says the discount window is a "backup source of liquidity" for banks "that are having significant financial difficulties."
The thing is, the four banks that used the discount window didn't need the money. They even made a point of saying that if they did need a loan they could get better terms elsewhere -- which is a credible claim, given that the banks in question are Citigroup, JPMorgan Chase, Bank of America, and Wachovia.
And perhaps to dispel the idea that it's peculiar to borrow funds you don't need, these banks went on to say that they did so "on behalf of clients." Not that I would ever find anything peculiar about the biggest money-center banks in the U.S. borrowing in order to lend, naturally.
Less peculiar still is the notion that borrowing more is the solution to a financial system crippled by overborrowing. Believe that one, dear reader, well then I've got a spec house that I really need to flip. It's got your name on it, so just make me an offer…