Today Feds did a large $18 billion drain of outstanding temporary market operation loans. By some interesting coincidence that was at the day when oil gets to $100. I think the sharp improvement in Libor and CP gave Feds the much needed room to drain the funds and send the dollar up. I don’t think they mind the recession and I don’t think they will move a finger to prevent a recession – it looks like something bigger is at the stake, and it it smells like more long-term thinking for me.

If that drain sticks for few days we will have a sharp bear market in the nearest future

Update: Lee Adler claimed that Feds drained not $18 but $33 bln. No matter how you twist it but this Ben is not doing any drops from helicopters at all. He must be up to something

I think it may take a while before we know the real motives, but we can guess. If we treat the Fed mandate rather broad then it will also presume that the Feds must care about the long-term global competitiveness of American business. At this point it is rather vulnerable. First, huge amount of money are assembled by oil exporters who, by some strange coincidence, are usually pretty rogue nations. Second, China is building a stake that is used to take stakes in our crucial businesses. The crash of communism 16 years ago had send the world into unprecedented expansion, which lead to unsustainable rate of consumption of world resources and also reallocate powers into states that we consider, er, not very responsible.

The sharp contraction of the world economy may (likely) restore the balances the way we prefer and also buy us some time to reduce the energy and resource efficiency of our economy. Who knows, maybe at the time of next expansion we’ll be able to consume less oil than we do now and yet increase output and profits. It just need time, and the recession will give that time. Or not