The McCulley Plan, More of the Same
Comment to the McCulley Plan: Global Quantitative Easing
Madness it is. Here is the largest manager of bonds globally advocating the all-out liquefaction of the system. His main argument, demand is missing and demand must be created, no matter what.
Never once does he mention when and how all this liquidity shall be mopped up again. The theoretical concept remains that when growth picks up, the Fed will take liquidity out of the system. Nothing but a strong recovery would allow it to do that and given the facts of this crisis that is a very brave assumption to make. Equally, Paul and others still implicitly assumes that most debt accumulated is sound and was invested by system, with a process that has reached the pinnacle of efficiency. That assumption is even braver than the first one.
Why is no one calling Paul on this?
He is right in saying that the government is the only institution that can counteract the retrenching of the private sector during the downturn. That activity however, should stay within its financial capabilities and expertise. The extent of quantitative easing necessary to sort out today’s mess is likely to destroy the present system.
You can read the details in “Eye of the Storm”, chapters 6, 8, 20 and 21 should be of particular help with the subject.
Category: Monetary Policy, financial Crisis | Tags: AIG, Alan Greenspan, bailing, Banks, Ben Bernanke, Black Scholes, CAPM, Crash, credit, crisis, cycles, economy, FDIC, FED, Finance, financial Crisis, fiscal policy, GDP, George Bush, Goldman Sachs, government plan, Hedge funds, Henry Paulsen, Krugman, Lehman, leverage, Merrill, Modern Finance, Monetary Policy, Morgan Stanley, property market, securities and exchange commission (SEC), Shadow banking, sub-prime, Taleb Nassib, TARP, Tim Geithner One comment »
April 6th, 2009 at 11:33 pm
Couldn’t agree more with the above. When all firewalls between Government and Central Banks are tore down, disaster is just a few steps away. It makes your head spin if you hear the biggest manager of bonds advocating correlated (not co-ordinated) quantitative easing. He even warns that the ones not participating will suffer a trade shockfrom the real appreciation of their exchange rates. So, in other words, he is advocating a race to the bottom for currencies. Which country can debase its currency the fastest? Sheer madness this is!
Another concept I struggle with is his advocacy for zero real return on cash holdings. In economics, putting cash aside, also called saving, is pushing consumption into the future. This is only rational behaviour if you think you can buy more for your money later – hence, earning a real return is quintessential to enticing people to save at all. So much for economics 101…