Central banks on both sides of the Atlantic are actively engaged in discussions about the feasibility of mass purchases of mortgage-backed securities as a possible solution to the credit crisis.
Such a move would involve the use of public funds to shore up the market in a key financial instrument and restore confidence by ending the current vicious circle of forced sales, falling prices and weakening balance sheets.
The conversations, part of a broader exchange as to possible future steps in battling financial turmoil, are at an early stage. However, the fact that such a move is being discussed at all indicates the depth of concern that exists over the health of the banking system.
It shows how far the policy debate has shifted in recent weeks as the crisis has spread to prime mortgage assets in the US and engulfed Bear Stearns, the investment bank.
The Bank of England appears most enthusiastic to explore the idea. The Federal Reserve is open in principle to the possibility that intervention in the MBS market might be justified in certain scenarios, but only as a last resort. The European Central Bank appears least enthusiastic.
Any move to buy mortgage-backed securities would require government involvement because taxpayers would be assuming credit risk. There is no indication as yet that the US administration would favour such moves. In the eurozone it would require agreement from 15 separate governments.
One argument among policymakers and bankers has been that new international rules have exacerbated the credit squeeze by requiring assets to be valued at their current record lows rather than at face value.
But a strongly held view at one European central bank is that it is not “mark-to-market” accounting that is to blame for severe weaknesses in banks’ balance sheets but that prices of MBS securities have fallen to levels that imply unrealistically high rates of default. (emphasis added)
Or, just perchance, the “severe weaknesses in banks’ balance sheets” could be due to the fact that many of those banks’ assets are, in fact, impossible to sell and are thus worthless, at least functionally.
Keep these facts in mind as you consider the implications of this latest piece of Federal Reserve craziness:
1) The FedGov is $9,392,204,908,953.75 in debt to the creditors of the world, as of March 20, 2008;
2) In addition to that incomprehensibly-huge $9 trillion-plus amount, your elected representatives in Congress (the states and the locals have done the same, remember) have promised to pay an additional $52.7 trillion in benefits over and above the resources currently being set aside currently to do so; and
3) Funding for the bulk of this ongoing spending binge comes from Japan, Communist China, the UK (including its offshore banking havens), and the world’s oil-exporting countries.
Did you ever wonder what would happen if one or more of these buyers of the FedGov’s IOUs (that’s all a government bond is, after all) said that they would prefer to do something else with their money, rather than keep lending it to such an out-of-control spendthrift?
No need to wonder – it’s already happening:
As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.
Asian, Mid East and European investors stood aside at last week’s auction of 10-year US Treasury notes. “It was a disaster,” said Ray Attrill from 4castweb. “We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed.”
The share of foreign buyers (“indirect bidders”) plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns…
Now, on top of that very shaky platform, comes a private entity called the Federal Reserve with multi-hundred-billion dollar “rescue plans” that will cost the American taxpayer his shirt, both through whopping tax increases (needed to make the interest payments on the ever-mounting pile of debt) and likely hyperinflation.
BOHICA, my friends.
And as our little Chinese friend advised, hold that gun tightly in your hands.
You’re going to need it.