Fed capitulates: the central bank is broken

... it appears that the US Federal Reserve has given up on the idea of easing stress on interbank and wholesale lending and is resigned to being the central bank-come-market-maker of last, first and every resort... Ben Bernanke knows this scenario. It’s not been admitted yet, but it’s looking very much like a liquidity trap. Rates on T-bills are already precipitously close to zero.

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At its core, the Bernanke Twist is a direct effort to try and support prices; to stop destructive debt deflation. We are in uncharted territory though. The Fed is not just trying to game the market in US government debt. It’s trying to support the entire asset-backed debt market.

Which is particularly risky when the the Fed is effectively supporting those prices by positioning itself as a risk sump.

No wonder, as Krugman says, Fed officials are “nervous”. This is an all-out gamble.