As I read reports of further stimulus packages, new bank bailout plans in the US & UK etc., a shudder passes thru me.....have the Fed & Western Governments gotten themselves into a Abhimanyu situation - deep inside the Chakravyuhah without knowing the ways to escape alive?
Seems we are in clearly uncharterred territory. The massive amount of balance sheet the Fed is taking & yet the amazing rally in bonds (& fall in interest rates) are a clear evidence of this fact. Clearly something has to break. And even if rates continue to fall & bonds continue to rally, there would be some serious damage in the long term. Am not expert enough to predict what that would be, but its only logical to assume that currency will be devalued significantly since these bonds will be funded through printing of notes. And that could either result in massive inflation at a later point or a complete loss of confidence in currencies (Gold could be beneficiary).
Related Links:
http://money.cnn.com/news/specials/storysupplement/bailout_scorecard/index.html
http://www.moneymorning.com/2009/01/14/hyperinflation/
Another interesting point I noticed is how the focus in recent Bank results have turned to credit growth & amount of new loans disbursed. Seems the Fed is forcing Banks to ensure they use the govt funds to lend to various customer segments. British PM, Gordon Brown, yesterday is supposed to made a statement stating 'Lack of credit growth" is the "biggest issue today". This seems a bit puzzling to me. Its apparent Banks across the world grew extremely large on the back of very limited capital & while this is good in normal times, when the assets are turning bad, the sheer lack of capital is taking them to the doors of bankruptcy.
More than lack of credit, the clear & simple issue facing the financial industry today is lack of Capital. And that will be the topic of my next blog shortly.
cheers
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Interesting that you should mention the lack of capital. When TARP was originally proposed (when Paulson said to the world, "Just Trust me"), the idea was to buy off all the bad assets from the banks. Pricing was a major issue. Meanwhile Brown says capitalization is more important and so he just gave money directly to the banks. People everywhere admired Brown for his leadership and America fell in line. That then led to the government guaranteeing the bank deposits to further boost confidence. When none of that worked, the US has now gone back to its original idea now again saying that banks need capital and not assurances, they cannot raise new capital until they write off their loses, the government must step in to remove these loses from the balance sheet, but how are we gonna price them? Full circle, eh?
ReplyDeletehttp://money.cnn.com/2009/01/19/news/loans.banks.fortune/index.htm?postversion=2009011915