Perhaps some day the Fed will run out of money. The equivalent is happening in China. The People’s Bank of China managed to put a truck-load of money into US mortgage-backed securities and paper issued by Fannie Mae (FNM) and Freddie Mac (FRE).
It is hard to be critical of the communist bankers since they made the same mistake as almost every large financial firm in the US and EU.
It is nice to be a big bank in China. The government is willing to lend a hand. According to The New York Times, "Most likely, the finance ministry would simply transfer bonds of other Chinese government agencies to the bank to increase its capital."
Perhaps it is a freak coincidence that bond king Bill Gross of Pimco said that the systematic sell-off of assets by financial firms could put the credit markets into a flat spin. Gross recently wrote "if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury."
Gross may have been spending time with the financial ministers on the mainland.
Unfortunately, Gross may be panicky, but he is probably right. Financial institutions, including everything from commercial banks to hedge funds, need cash and do not want to be caught with holdings which could rapidly lose more value. In a race for the emergency exit all of the parties are getting bloodied.
Gross may have the right solution and it may be one that plays well in China. The government there has a large reserve of cash from years of running surpluses. Moving money into the People’s Bank is a reasonable solution to offset bad investments.
Back in America, the Treasury has to eventually turn to the tax-payer to pick up more bullion. That is the same tax-payer who can no longer afford his house. The consequences of Gross’s reasoning taken to their full extent are that the US working population is the last resort from keeping the global financial system from falling into pieces.
Truck drivers and waitresses get to save the world.
Douglas A. McIntyre