What the Fed is doing

The Fed can act to control the overnight interest rate in two different ways. In one of them it buys or sells treasury bonds to establish its target for that rate on a "permanent" basis. The other way is to buy bonds on a "temporary" basis with repurchase agreement. This is done in case of transient dislocations, to bring the rate back to the target. This is precisely what the Fed is doing now. It is very important to distinguish the implications of one and another actions. With the first move, not only liquidity is pumped into the system, but it also improves solvence since troubled debtors will have a relief in their debt burden. The second helps liquidity only, preventing the credit crunch from killing the good guys.

Needless to say that the persons who are struggling to repay their mortgages will see no improvement in their situation, and so the problem will continue. There is no reason for the stock market to cheer the move. The crisis is indeed a matter of solvence. Wall Street is yelling at the Fed to lower the target rate, so that the party will go on. That's precisely why the Fed should not move. Otherwise the problem will simply snowball into the future. The cost of ending it later on will just increase.

It is worth noting that the ECB poured much more money into the European system than the Fed did in the US. Today the ECB injected 65 billion dollars in their system, against paltry 2 billion from the Fed. This might be an indication that the epicenter of the quake is in Europe...