Monday, 15 September 2008

The 5 Step Plan

We may be turning Japanese I really think so.FT alphaville has a salutory post on Japanification. The post suggest five steps in crisis management:
1. In order to head off the debt/deflation vicious spiral, monetary policy needs to be extraordinarily stimulative. The risk of runaway inflation is minimal.
Agreed, but even more important is that liquidity policy needs to be very loose. I should be able to repo my dry cleaning receipts at the central bank, at least for a while. The FED's steps to not so much open the window as knock out the whole back wall out with a JCB are absolutely right here.
2. Fiscal policy has a job to do when the money multiplier collapses. Forget about crowding out - bullish bond markets will absorb all the supply they can get.
Agreed again. It is time for some good old fashioned Keynesian stimulus. Could we please fix the railways as part of that? And how about some other green measures too? Spend on infrastructure for the future.
3.”Strong hands” ( investors with risk-taking capacity) are like gold-dust. The sovereign wealth funds of emerging economies are now in the position to play the role that hedge funds and vulture funds did in Japan and Asia in the 1990s. They should be welcomed, not shafted, criticised, or over-regulated.
Ummm, to some extent. Politically it may be better to pass on more costs to future generations than to pass ownership of the financial system East. Just as energy security is a concern, so should the ownership of the financial system. So yes, welcome capital, but not without some care.
4. Forget about moral hazard. Somebody has to take the credit risk. Future generations are the best candidate because they’re going to have a better life than us, with all kinds of cool gizmos and hobbies. They won’t notice, really.
With the proviso that the equity holders of failed or failing institutions need to be thoroughly caned, yes. The state can and should take a boat load of asset price risk in order to bail out the financial system. The price will be future regulation.
5. No schadenfreude. Never ask for whom the bell tolls. It tolls for thy portfolio.
Awww, c'mon. Merrill was (mostly) a great firm. To see it as part of BofA is a great shame and I certainly have no wish to chortle about that. But no little laughs about Jimmy Cayne? Now you really are asking too much.

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