Friday, October 10, 2008
Earlier today, Jim Rogers' suggested course of action to help cure what ails financial markets was made clear in this Bloomberg interview where he channeled Andrew William Mellon, the Secretary of the U.S. Treasury from 1921 to 1932.
This "liquidationist" thesis, while considered an outdated concept today, may well be the most prudent course or action given where we are now, but it would certainly be quite unpopular and politically unacceptable.
Allowing everything to come tumbling down quickly so that it can be rebuilt in a more sturdy fashion and thus minimize the total quantity of pain that is delivered just doesn't seem to be a popular idea, likely due to the sad reality that most still believe that the financial system now crumbling around us was fundamentally sound.
It wasn't - hasn't been for decades.
Economists and policy makers these days - even the most bearish ones - seem to be unanimous in their proposed solutions, nearly all of which contain the same critical element of requiring a "bigger bucket" to bail the water now gushing quickly into the ship.
In commentary last night, Nouriel Roubini suggested the following:
- another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;It seems the old analogy about firemen not worrying too much about water damage while putting out a fire would be appropriate here - better not to worry about what exactly is coming out of the fire hose.
- a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;
- a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
- massive and unlimited provision of liquidity to solvent financial institutions;
- public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
In an op-ed piece in today's Wall Street Journal, former Federal Reserve Chairman Paul Volcker argued the tools are already in place to counter the current slide:
First of all, there is now clear recognition that the problem is international, and international coordination and cooperation is both necessary and underway. The days of finger pointing and schadenfreude are over. The concerted reduction in central bank interest rates is one concrete manifestation of that fact.Here too, the thinking seems to be that if we just do much, much more of what we've been doing, somehow, things will turn out OK.
More important in existing circumstances is the clear determination of our Treasury, of European finance ministries, and of central banks to support and defend the stability of major international banks. That approach extends to providing fresh capital to supplement private funds if necessary.
In the U.S., with higher limits of deposit insurance in place, the FDIC has demonstrated its ability to protect depositors, to arrange mergers, and to provide capital for troubled banks. Most other countries now have a comparable capacity.
Recent U.S. legislation has provided authority for large-scale direct intervention by the Treasury in the mortgage and other troubled markets. Along with increased purchases by Fannie Mae and Freddie Mac, now under government control, means of restoring needed liquidity are at hand.
And Stephen Roach writes in the Financial Times from his perch in China:
Yesterday's rare co-ordinated easing by the world's leading central banks was an important step in the right direction. The risk is it may not have been enough.If things do somehow stabilize in the period ahead and some sense of normalcy returns to markets next year, the inflationary impact of all the present and future "bailing" could be tremendous.
This crisis is so grave and so threatening that it is critical that policy err on the side of overkill - not underkill. That is true of both monetary and fiscal policy alike.
I would have preferred to have seen rate cuts of twice the magnitude that were announced yesterday - leaving no mistake as to the power of the weapons being deployed as well as the collective resolve of the stewards of the global economy.
I would also have preferred a blanket statement to have been issued by the world's leading central banks that they are collectively prepared to backstop global liquidity in the broadest sense. This endorsement should also include the cash (but not derivatives) markets of counterparty risk.
You thought $4 gasoline and $1,000 gold was bad?
The arguments of Jim Rogers and Andrew Mellon are starting to look smarter every day.
What's also looking like an excellent idea (in hindsight) is to have "pricked" a few of these asset bubbles over the last twenty-some years so their bursting wouldn't lead to what is unfolding today.