So the market has rallied on Ben Bernanke's latest rescue plan. The Fed is says it will lend $200 billion of Treasuries to the securities firms that trade directly with the central bank in return for mortgage debt. And it might escalate if need be.

This raises two questions. What does it say about the extent of the crisis? And will it work?



"It is a strong attempt to stabilize a crisis. t is a further recognition that this credit crisis is deeper and wider, and has been exceedingly opaque, in contrast to earlier credit crises,'' Henry Kaufman, president of Henry Kaufman & Co. in New York and the former chief economist at Salomon Brothers Inc., told Bloomberg.

On one hand, the residential mortgage securities market is the cornerstone so the Fed's rescue plan is an attempt to stabilize and fix the other problems. But it's tackling the wrong issue and could be delaying the inevitable.

As columnist Malcolm Maiden points out, it's just a short-term fix. "Bernanke's liquidity injection eases the market's short-term liquidity problem. But a credit squeeze could crush economic growth, corporate earnings and share prices, and investors can't be certain that it has been averted until the banks own up to all their losses, and rebuild their capital bases. That moment could still be months off, and will probably involve a bigger US Government bail-out."

Or as London-based investment consultancy Independent Strategy points out, it creates more liquidity but it doesn't resolve the underlying issue of solvency. And that's the problem.

"There is a big difference between creating a lot of liquidity and resolving an issue of solvency, which is the driver of credit contraction in all sectors today ... The Fed is King Canute trying to halt an ebbing, rather than a rising, tide. It will succeed in producing a market blip. But the US financial system will remain burdened with uncleansed balance sheets penalizing productive lending and economic growth. In addition, the dollar will be further debased and inflation will move higher as a consequence. Fed policy will not stop the process of deleveraging and asset price decline."

You can read more of Independent Strategy's views here