Wednesday July 16, 2008 - 14:21:16 GMT
Share This Story
Foreign Exchange Analytics - www.fxa.com
Forex Blog - Bernanke, Paulson Need Markets to See Mama Mia and Get Happy
Rather than committing
unlimited taxpayer dollars via the Treasuryâ€™s credit lines or the Fedâ€™s
discount window to the GSEs, how about the Treasury hand out tickets to Mama
Mia for a far more effective mood changer? A little Abba can do far more
for investor confidence in US financials than any pocket bazooka.
Paulsonâ€™s bazooka metaphor suggests warâ€¦with traders, investors and all
comers. Why not make music instead? Cue up Dancing Queen.
After all if SECâ€™s Cox is right its 90% perception and 10% reality. Evil
short sellers seem to be the focus of regulators, not bankrupt management and
zero risk controls. I also find it ironic that Paulson came into the
Treasury job touting the need for less regulation of capital to better compete
with other financial centers, calling the financial markets the most robust of
I also could not help but
see more irony at the Hill testimony Tuesday as Democrats seemed eager to
extend Paulson a blank check to support Fannie and Freddie while the
Republicans said not so fast. Jeffrey Sachs of Columbia University said in a financial crisis there are no libertarians. However
Senator Bunning is surely the exceptionâ€¦Representative Paul however is a
libertarian in a parallel universe.
But it is also dicey if the
Republicans in Congress force a delay in the Paulson backstop plan â€“ this would
put the onus on the Fed if the GSEs canâ€™t raise funds to finance their enormous
balance sheets â€“ Freddie has about $4bln in notes to sell Thursday. Hank,
make some calls.
What seems most surprising
is that the run on IndyMac was not repeated elsewhere in the country â€“ like in
Seattle and Cleveland for starters. Maybe Joe and Sally Public were at
the premier of Mama Mia. Nevertheless, the IndyMac Great Depression redux
will show up at the very least at many regional banks. The FDIC has 90
regional banks on its unpublished at risk of failure listâ€¦IndyMac was never on
it. And I read that the FDIC bailout of IndyMac insured deposits will use
up 10% of the agencies available pool of funds to make good on $100K
guarantees. Do the mathâ€¦FDIC gets emptied quickly and then we go back to the
Hill for a fill up.
It is scary that Congress is
now the key player in the financial crisisâ€¦torch was passed from the Fed to
Treasury and Paulson Tuesday handed it off to the Hill. The Hill is truly
the Gang That Canâ€™t Shoot Straight. Mamma Mia.
Which leads me to the idea
of contingency planningâ€¦we are told in the financial press that US Treasury had
a GSE plan ready to go for weeks if not monthsâ€¦hmmm. Presumably it has a
contingency plan for a run on the dollar. What will this plan look like?
In the spirit of thinking
outside the box, currency intervention is surely not the crux of any dollar
contingency plan. It may be a tactic deployed, but there has to e some
other set of policy measures the Treasury, in consultations with the Fed, have
On a purely speculative note
here are some ideasâ€¦
US Treasury issues dollar
currency bills that pay 100bps over T-bills and are pitched to foreign
investors, sovereigns. The proceeds do not go to financing the budget
deficit but are held in escrow for redemption at some fixed date (like CD) and
the financing of the higher rate is split between US Treasury and sovereigns
holding large balances of Treasuries with the NY Fedâ€™s custody accountsâ€¦some of
the interest income paid to reserve managers gets siphoned off to pay interest
on the dollar currency bills â€“ it is our currency and it is the worldâ€™s
Even more outside the box
would be the government selling oil and goldâ€¦I have run this by senior
officials and seems highly unlikely. But in these times never say never.
In terms of the Fed and the
dollar, there is no scope to hike now (again I think the Fed could have hike in
late June tacticallyâ€¦but conditions have changed and this opportunity is
lost). So interest rates are off the table in the event of a run on the
dollar. In terms of the ECB and other central banks, rate cuts are off
So it may come down again to
Paulson appealing to Congress for the authority to issue currency bills (or
some other measure). What scares me now is that the crisis response is
now in the hands of Congress and this is the worst of all possible situations.
We read lots of references
to the Great Depression â€“ finding out what and why things like the FDIC, FHLBs
and SEC were really all about some 75 years later. So why not look at
Carter bonds (marks and Swiss franc denominated bonds sold to non-domestic
investors and proceeds were used to buy dollar) and gold sales as effort to
support the dollar in the late 70â€™s as another historical precedent in terms of
what surprises officials may have in mind for a possible run on the dollar?
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."