Forex Blog - Emergency Economic Stabilization Act of 2008?
Capital markets are in lock
downâ€¦very little trading is happening in any financial instrument or currency.
Banks have reduced trading to non-leveraged real money accounts, corporates and
prime broker accounts. There is no lending between banks.
Commercial paper market is still broken. Municipal bond market is broken â€“
no ability to issue. Companies are hoarding cash fearing loss of credit
from the banking system as one institution after another falls to the wayside.
And banks are hoarding cash poured in by central banks through the back door
before it flies out the front door to companies desperate to fund month-end and
quarter-end liabilities. The Paulson plan is supposedly a done deal and
just needs the stamp of approval from Congress which the leadership on the Hill
asserts is in place (I think it is less certain in the House â€“ look for vote
around to ) and yet capital markets are cratering.
Banks are running out of
funds, despite what we hear from the FDIC and the banks themselves. This
is a run by institutions on the global banking system and the Paulson plan is
not working â€“ there is less confidence in the global banking system now than on
Friday â€“ spreads tell us that.
I think global banking
authorities are going to have to agree to a bank holiday â€“ shut them down to at
least halt the run on banks â€“ of 3 or 4 days (FDR closed banks in March of
1933, his first day in office of his first term as president to end a depositor
run on banks). All of these weekend forced marriages between major
financial institutions are having the opposite affect on markets â€“ they simply
expose everyone to growing problems, not growing solutions. And with each
day the $700bln looks disproportionate to the scale of the problem.
Enter Europe. The banks across the pond it turns out may have more leverage
and bad assets than the banks in the good olâ€™ USA. And the response from European authorities is
reminiscent of the case-by-case approach of the US authorities that emerged in March with the near
failure of Bear Stearns. With one exceptionâ€¦every institution is too big
to failâ€¦at least so far and in the wake of the Lehman mess I suspect that will
hold up ahead unless governments run out of capital to keep banks solvent
(short of monetizing â€“ debt issuance issue to pay for all this will hit
European governments ahead too and talk about crowding out ahead).
So Europe still is lacking a comprehensive approach to the
problem (I would argue so is the US which the EESA represents and US Tsy and Fed have
moved from carnival whack a mole to the industrial strength version).
In other words the problem
is outstripping the ability of officials to respond to itâ€¦and this is an
asymptotic path. It is not unreasonable to ask whether firms that have
not tapped revolvers with their banks will be able to meet payrolls and
payables this week â€“ month-end and quarter-end. And there is also the
risk that the runs banks are displaying with each other and their corporate
customers are displaying will reach the retail accountsâ€¦it did reach WAMU
retail accounts and IndyMac before that.
Again the future should
include a global bank holiday with regulators going into financial institutions
and identifying good banks and bad banks. And bad banks go to the FDIC or
European equivalent for workout (private capital is still willing to pay for
deposits) and good banks open with the seal of approval of regulators with
access to all the mark-to-make-believe assets.
Coordinated rate cuts ahead
are not likely to be helpful. They should be saved for real economy
weakness which should be coming to an economy near you shortly.
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