Interest Rate Roundup

Thursday, September 04, 2008

The great bailout debate: More or less help needed?

Some interesting commentaries out today on both sides of the bailout debate. Mark Gilbert at Bloomberg reports on how we may need the ECB and Fed to stop keeping weak institutions alive via all these special auctions and liquidity facilities. Bill Gross at Pimco takes the opposite tack -- he wants the government bailout machine to really crank up.

First, Gilbert ...

"It is considered impolite to notice the elephant in the room, let alone stare at the pachyderm. So kudos to European Central Bank policy maker Nout Wellink, who committed sacrilege last month by pointing out that the financial community is becoming addicted to central-bank funding.

"There comes a point where you take over the market,'' Wellink told Dutch newspaper Het Financieele Dagblad. "If we see banks become very dependent on central banks, then we need to stimulate them to tap into other financing sources.''

"That's easier said than done. The ECB, the Federal Reserve and the Bank of England all face a tricky task in their respective intensive-care units in the coming months -- unhooking the banking world from the life-support machine of easy money without killing the patient.

"Central banks have morphed from being lenders of last resort to becoming the first port of call for institutions in need of cash. The twist is that the cash isn't even flowing onward into the hands of business owners and home buyers; it's being hoarded by fearful banks sandbagging their perimeters against the ebb and flow of the deteriorating global economic outlook.

"In the U.S., the Fed is funneling cash to commercial banks that are outside its regulatory jurisdiction as well as to the investment banks it oversees. The ECB lent 467 billion euros ($676 billion) last week to banks with operations in the euro area, beating the 389 billion euros it provided in mid-December to ease banks through the end of the year.

"And UBS AG analyst Alastair Ryan reckons banks may have borrowed as much as 200 billion pounds ($354 billion) from the Bank of England's Special Liquidity Scheme, four times more than the central bank envisaged in April."

And then there is Bill Gross ...

"Step 2 on our delevering blackboard therefore has stalled and is inevitably morphing towards Step 3. Assets are still being liquidated but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning. There may be a Jim Cramer bull market somewhere, but it’s primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices.

"New balance sheets? Is this now some Deloitte & Touche metaphor? Hardly. What I mean, what our blackboard and our Investment Committee point out is that to ultimately stop this asset/debt deflation, a fresh and substantial new source of buying power is required. This became all too obvious as the Treasury’s attempt to entice additional capital into Freddie and Fannie came up empty. Yet this same dilemma is and will continue to confront all highly levered institutions in the throes of asset liquidation. Without a new balance sheet, their only resort is to sell assets, which in many cases leads to further price declines, or ultimately debt liquidation/default.

"A Depression-era bank robber named Willie Sutton once said that the reason he robbed banks was because “that’s where the money is.” Illegal for sure, but close to an 800 SAT score for logic if you were in the business of stealing other people’s money. And now, while some will compare current government bailouts to Slick Willie, citing moral hazard, near criminal regulatory neglect, and further bailouts for Wall Street and the rich, common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.

"The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something … knows something,” it is time for the Treasury to do likewise."

Who do you think has it right?

3 Comments:

  • B Gross is a voice that needs to be silenced. See if the Govt doesnt bail out everyone, Pimco is toast and he knows it. He is sending a message to Bernenke, his bi_ch. Gross should have his citizenship revoked as his position is outright traitorous(taxpayer bailout of private /public institutions).

    By Anonymous Anonymous, at September 4, 2008 at 1:59 PM  

  • If this were the judgment of Solomon, I think we'd end up with two halves of one baby: it's not crying anymore, but it still caused an almighty mess.

    By Anonymous shtove, at September 4, 2008 at 4:14 PM  

  • Not a big deal in my opinion. He owns alot of mortgages, so he is talking his book.

    By Anonymous Anonymous, at September 4, 2008 at 8:43 PM  

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