Nobody knows why the market rose 416 points yesterday. But The New York Times reports that the Fed made an extraordinary move yesterday -- it offered banks $200 billion for a month -- letting them use Collateralized Debt Obligations (CDOs) as collateral for the loan. This inflationary move helped drive oil to $109.72, up 357% since 1/19/01 and cut the dollar declined to one Euro to $1.5469, down 68% since 1/19/01.

But beyond the inflationary impact of the move, there's less here than meets the eye. Certainly, the surprise effect might have forced investors who had a short position to cover by buying back shares. That short-covering may have had a snowball effect. But there's also this -- if banks take those $200 billion off their books, there's still $6.1 trillion worth of CDOs on the market. And what will happen to those $200 billion worth of CDOs at the end of the month?

But there is an interesting twist -- the Fed claimed in a conference call with reporters that it was minimizing risk by accepting only securities that still had the highest triple-A ratings and that they would impose a discount, on mortgage bonds that appear to carry additional risk. If there is any meaning in those AAA ratings then the banks will end up pledging their highest quality securities as collateral and retaining more of the dodgy ones.

I am not sure about the accounting, but the move appears to transfer temporary custody of those CDOs to the Fed. The Fed is acting like a printing press rather than a bulwark of strength for the U.S. dollar. The Fed's liquidity moves -- all the loan programs it's pushed and the drop in the Fed Funds rate from 5.25% to 3% (now likely to decline to 2.5%) -- are definitely sending inflation on a tear. But as I posted, the market tends to rise on these surprise moves and then continues to decline -- this is what I think of as the Bernanke Call.

While the Fed keeps pulling bigger and bigger rabbits out of its hat, what will really cure this problem is for banks to write down the value of their bad assets and to raise capital to make up the difference. Unfortunately, the only source of such unlimited capital appears to be the Fed. And it refuses to give the banks capital, it's just making short-term loans. The market will see through the temporary nature of this tactic -- and regrettably will continue to fall.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.