What's Noise, What's News: Wednesday August 22

What's Noise:

What's noise this morning is, appropriately, splashed under the "What's News" section of the Wall Street Journal's home page as I write:

FED OFFICIALS ARE cautiously optimistic that markets are stabilizing, but many on Wall Street are more pessimistic and say rate cuts are needed.  9:39 a.m.
Stocks rallied early Wednesday as investors welcomed merger activity that has largely been absent in recent weeks, and as anticipation of a Federal Reserve rate cut increased. Markets were higher in Europe and Asia.  9:48 a.m.
What's News:

The real story is going largely unreported.  Or rather, it's being reported but considered unremarkable: The big boys on Wall Street are looking to the Fed to pull their rear ends out of the wringer.  Yes, it was the Fed's monetary expansion that put their keisters there in the first place, but these are the big boys and they ought to know better.  Certainly they ought to know better than the poor saps at the bottom of the totem pole who took out mortgage loans they couldn't afford.  Dean Baker:

What is happening now is that the banks and funds, after being oblivious to risk for the last five years, suddenly noticed that much of the debt they hold is not very creditworthy. They desperately want to dump this debt and exchange it for safer assets. The Wall Street crew wants the Fed to lower interest rates, which will reduce the cost of carrying this debt, and thereby give them more time to find some suckers on whom to dump it.

Stunning.  It's not enough for these guys that the Fed is actually accepting some of these junky mortgage-backed securities as collateral on loans, which in media shorthand becomes "injecting liquidity."  They expect the Fed to lower interest rates not to stabilize the economy (which it would accomplish only at the cost of tanking the dollar and igniting inflation) but merely to save their bacon.

And they'll probably get their way.

The Daily Reckoning