2/18 Peter Rhalter - Galactic Moral Hazard
Found this today on Le Metropole and thought I would include it on my site….
Interesting.
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Galactic Moral Hazard
Peter Rhalter
“Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.
That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London…
"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit — preferably tax cuts — or restoring overvaluation of equity prices," Connolly said on Monday…”*
So here’s an economist who thinks it will require giving the US Government statutory authority to buy stocks and other assets in order to re-inflate prices and prevent another Depression. I guess he doesn’t realize the Feds are already doing that—and a lot more—through intermediaries like Goldman-Sachs and Morgan. Anyway, leaving aside the issues of creeping socialism and moral hazard on a galactic scale, when I got done laughing I had to ask, “What are they going to pay with?”
Think about it; the Federal Government has unfunded liabilities in the trillions already. Now they are going to start supporting asset prices in how many markets? As it is, the federal government is borrowing hundreds of billions from abroad just to stay afloat. If anyone is going to buy the American economy, it won’t be a deadbeat Uncle Sam but rather our overseas creditors—who can cherry pick this country’s assets and own them outright through Sovereign Wealth Funds. In any case, if the US Government goes down that road it won’t be long before greenbacks will be worth as little as their Continental Dollar precursors. Then the Depression would arrive, anyway.
Mr. Connolly should make no mistake about this point either: supporting one market requires supporting all markets, from Muni bonds to mortgages obligations to you-name-it. Otherwise people will liquidate assets in the markets that don’t have guarantees in preference for the markets that do. Nothing can compete with a government guarantee, so long as the government is solvent. That’s why, in times of crisis, every other kind of debt obligation gets sold to buy Treasuries.
I’m sure that Mr. Connolly’s rescue plan is well-intentioned. It just goes to show, however, that there is no rational, or workable, escape from the present dire circumstances; circumstances that have been exacerbated by a long line of ill-advised governmental actions over the years. More of the same will just dig the hole deeper. That a plan of this nature is being bruited about by a respected economist should serve as a strong reminder to not trust in paper debts and promises.
Best wishes,
Peter R.
* http://www.reuters.com/article/ousiv/idUSGOR2766022
0080212?pageNumber=1&virtualBrandChannel=0
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