Wikinvest Wire

Government sponsored shadow banks

Thursday, February 19, 2009

Paul McCulley of Pimco thinks the new kind of shadow banking system is just swell:

The United States government now has both the tools and the will to save the private banking system, and more importantly, the real economy, from its own debt-deflationary pathologies. Not that it will be easy. But it can be done, notwithstanding the catcalls that greeted Secretary Geithner last week.

And the essential game plan is clear: use the power of the Fed, the FDIC and the Treasury to create government-sponsored shadow banks, such as the Term Asset-Backed Securities Lending Facility (the TALF) and the Public-Private Investment Fund (the P-PIF).

The formula? Take a small dollop of the Treasury’s free-to-spend taxpayer money (there is still $350 billion left) to serve as the equity in a government sponsored shadow bank, and then lever the daylights out of it with loans from the Federal Reserve, funded with the printing press.
Yes, there will be subsidies involved, sometimes huge ones. And yes, the process will seem arbitrary and capricious at times, reeking of inequities. Such is the nature of government rescue schemes for broken banking systems, while maintaining them as privately owned.

You might not like it. I don’t like it, because regulators should never have let bankers, both conventional bankers and shadow bankers, run amok. But they did.

So it’s now time to hold the nose and do what must be done, however stinky it smells, not because it’s pleasant but because it is necessary.
Pragmatism takes on a whole new meaning at Pimco.


Anonymous said...

Could this be because PIMCO is holding a lot of finance industry paper?

Anonymous said...

It's not his fault. The rabbit told him to say it.

Anonymous said...

I am losing a lot of respect for all guys at PIMCO - including Gross, McCulley, and even their not so-recent import El-Erian. All these guys have suddenly become bulls for government spending/stimulus for housing, and anything in site for their own narrow gains in the bond market, and are afraid that market will crash any time.

Anonymous said...

And guess which side of the trade PIMCO will be on?

PIMOCO is scum.

Nick said...

Of course PIMCO is talking their own book, but this is the same thing everyone seems to be doing these days to rationalize the incredible levels of idiocy our government is getting to. I mean, we have already increased our national debt by 20% with SPENT money desperately trying to keep an obvious bubble inflated and obviously insolvent financial institutions afloat, and committed monies totaling the entire current value of the national debt to the same. People rationalize it with "doing what must be done to save the economy", when in reality it's the largest expansion of government deficit spending and waste in the history of the country.

It reminds me of the talk of bank nationalization, as if it's the inevitable outcome, and people just need to come around to it. How ridiculous is that idea? I mean, since when is socializing the losses from a massive industrial fraud and gambling debacle so core to our American values that it's inevitable, despite the probable doubling of our national debt as a result, and crippling our economy and currency for generations to come so we can bail out housing speculators? What kind of retarded nonsense is that when you really think about it? Yet, it's being talked about as inevitable... now that's some good propaganda.

PIMCO is just trying to ride the trend of convincing the American people that cutting off their own heads is good for their health. In normal times, they might be laughed at... but in today's times, it's so crazy it just might work.

Anonymous said...


'nuff said.


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