Bank Crisis: An Analysis by Jean-Pierre Robin
Published in Le Figaro
(France) on 13 March, 2008
by Jean-Pierre Robin (link to original)
Le Figaro's economist poses the following question: Will the United States resolve their banking crises without nationalizing losses?
Two hundred billion dollars of new money last week and just as much the day before yesterday. The Central American bank (the Fed) doesn't skip around to save the American banking system from the threat of implosion, as the actors no longer want to take the risk of lending. The money is not by any means a gift, as the public has the tendency to believe in France when such operations are undertaken. But these refundable advances of liquid assets to banks, and indirectly to all of the actors in the financial world, produce the same saving effect, which is vital for each establishment to balance its daily accounts. Tomorrow is a new day.
It becomes a question of collective survival and it doesn't give anyone the idea of discussing the cogency of Ben Bernanke's strategy, especially not in Europe. Since last summer, the president of the Fed exploited two areas. He massively reduced the interest rate on the other side of the Atlantic, from 5.32% to 3%, and another reduction is scheduled for next week. In addition, on several occasions, Bernanke has reduced the conditions for the granting of these funds.
The announcements of these last days aim to pass the course by the end of March, which corresponds to the account closure of companies for the third trimester. They are reminiscent of the injections of money, rather spectacular, which were effected at the end of 2007 for the annual billing sheets. And in the second case one notes that the Fed works in narrow technical collaboration with it's foreign counterparts, the Bank of Canada and the principle central banks in Europe, which make up the ECB(European Central Bank). Which shows that in spite of the differences of opinion on the subject of inflation, there is one essential agreement between the two sides of the Atlantic, “The American soldier must be saved”
Without acknowledging overtly, each has more or less the feeling that the very real banking crisis began last summer to provoke the worst recession since that of the '74-'75 oil crisis. Take, for example, the scenario envisioned by David Rosenberg, economist for Merrill Lynch. Wall Street's most “bearish” expert argues that for the first time in thirty years American homeowners are confronted with a triple shock: the price hike in oil and food, the depreciation of their real credit, and that of their stock portfolios.
Bernanke aims precisely to prevent the costs that cause these burdens. It has reached this point, at least partly, if one studies the action in Wall Street, which remains quite a bit slower than in Europe since the end of 2007. One can see in this the beneficial effects of the large fall in interest rates across the Atlantic as Europe has maintained the status quo. On the other hand, the danger remains that owners falling into bankruptcy could pull the banks down with them.
The problem is even more serious in that it goes well beyond the banking profession, strictly speaking. The securitization of real-estate loans, conceived as a powerful tool to share investors risks, has become a route for terrible contagion. However no one wants to accept these titles, which serve to support banks in the exchange of liquid assets between each other, to the extent they cause the doubt. From which arises a crises of the general treasury which hits equally speculative funds and investment funds like Carlyle.
As imagined by the Fed, the solution is simple in principle. It is much like a blood transfusion: one replaces the “bad money”, which no one wants, with the “good money”, which is totally irreproachable. The transfusion isn't complete, but it is of sufficient volume, one hopes, to move the blood. And so the principle measure announced by the Fed last Tuesday was to accord to 28 main American banks short term Treasury bills, in other words, liquid assets which present no risk in exchanges for titles guaranteed on mortgage claims whose real value might be much lower. It is important to note that the Fed is content to take these titles “in pension”: it does not buy them and thus does not carry the risk associated. At least not yet.
Will these injections be enough to irrigate the banking market and to repair the machinery of banking credit? The bet is not won. Admittedly, the Fed has an ultimate weapon to relive the situation. To buy all of the mortgages, which amounts to the nationalization of the risks of losses. An “unthinkable” solution, policy moves along, according to our affiliate Financial Times which doesn't hesitate to present it like a possibility. It is not the only one!
Two hundred billion dollars of new money last week and just as much the day before yesterday. The Central American bank (the Fed) doesn't skip around to save the American banking system from the threat of implosion, as the actors no longer want to take the risk of lending. The money is not by any means a gift, as the public has the tendency to believe in France when such operations are undertaken. But these refundable advances of liquid assets to banks, and indirectly to all of the actors in the financial world, produce the same saving effect, which is vital for each establishment to balance its daily accounts. Tomorrow is a new day.
It becomes a question of collective survival and it doesn't give anyone the idea of discussing the cogency of Ben Bernanke's strategy, especially not in Europe. Since last summer, the president of the Fed exploited two areas. He massively reduced the interest rate on the other side of the Atlantic, from 5.32% to 3%, and another reduction is scheduled for next week. In addition, on several occasions, Bernanke has reduced the conditions for the granting of these funds.
The announcements of these last days aim to pass the course by the end of March, which corresponds to the account closure of companies for the third trimester. They are reminiscent of the injections of money, rather spectacular, which were effected at the end of 2007 for the annual billing sheets. And in the second case one notes that the Fed works in narrow technical collaboration with it's foreign counterparts, the Bank of Canada and the principle central banks in Europe, which make up the ECB(European Central Bank). Which shows that in spite of the differences of opinion on the subject of inflation, there is one essential agreement between the two sides of the Atlantic, “The American soldier must be saved”
Without acknowledging overtly, each has more or less the feeling that the very real banking crisis began last summer to provoke the worst recession since that of the '74-'75 oil crisis. Take, for example, the scenario envisioned by David Rosenberg, economist for Merrill Lynch. Wall Street's most “bearish” expert argues that for the first time in thirty years American homeowners are confronted with a triple shock: the price hike in oil and food, the depreciation of their real credit, and that of their stock portfolios.
Bernanke aims precisely to prevent the costs that cause these burdens. It has reached this point, at least partly, if one studies the action in Wall Street, which remains quite a bit slower than in Europe since the end of 2007. One can see in this the beneficial effects of the large fall in interest rates across the Atlantic as Europe has maintained the status quo. On the other hand, the danger remains that owners falling into bankruptcy could pull the banks down with them.
The problem is even more serious in that it goes well beyond the banking profession, strictly speaking. The securitization of real-estate loans, conceived as a powerful tool to share investors risks, has become a route for terrible contagion. However no one wants to accept these titles, which serve to support banks in the exchange of liquid assets between each other, to the extent they cause the doubt. From which arises a crises of the general treasury which hits equally speculative funds and investment funds like Carlyle.
As imagined by the Fed, the solution is simple in principle. It is much like a blood transfusion: one replaces the “bad money”, which no one wants, with the “good money”, which is totally irreproachable. The transfusion isn't complete, but it is of sufficient volume, one hopes, to move the blood. And so the principle measure announced by the Fed last Tuesday was to accord to 28 main American banks short term Treasury bills, in other words, liquid assets which present no risk in exchanges for titles guaranteed on mortgage claims whose real value might be much lower. It is important to note that the Fed is content to take these titles “in pension”: it does not buy them and thus does not carry the risk associated. At least not yet.
Will these injections be enough to irrigate the banking market and to repair the machinery of banking credit? The bet is not won. Admittedly, the Fed has an ultimate weapon to relive the situation. To buy all of the mortgages, which amounts to the nationalization of the risks of losses. An “unthinkable” solution, policy moves along, according to our affiliate Financial Times which doesn't hesitate to present it like a possibility. It is not the only one!
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