Rogoff: Central Banks At Risk of Sinking Along With Banks

This Guardian article by Kenneth Rogoff (hat tip Mark Thoma) sends a blunt warning: central banks are taking on so much dodgy debt that they will put themselves at risk if they continue extending support to their banking systems. Rogoff argues (as we have) that the banking system needs to shrink (an inevitable consequence of reducing excessive and unsustainable leverage).

What makes this alarm noteworthy is that Rogoff is a Serious Economist and has (along with Carmen Reinhart) done considerable work in examining financial crises. Thus he is particularly well qualified to make this diagnosis. But will anyone in authority take heed?

From the Guardian:

A year into the global financial crisis, several key central banks remain extraordinarily exposed to their countries’ shaky private financial sectors. So far, the strategy of maintaining banking systems on feeding tubes of taxpayer-guaranteed short-term credit has made sense. But eventually central banks must pull the plug. Otherwise they will end up in intensive care themselves as credit losses overwhelm their balance sheets.

The idea that the world’s largest economies are merely facing a short-term panic looks increasingly strained. Instead, it is becoming apparent that, after a period of epic profits and growth, the financial industry now needs to undergo a period of consolidation and pruning. Weak banks must be allowed to fail or merge (with ordinary depositors being paid off by government insurance funds), so that strong banks can emerge with renewed vigour.

If this is the right diagnosis of the “financial crisis”, then efforts to block a healthy and normal dynamic will ultimately only prolong and exacerbate the problem…

The United States Federal Reserve, the European Central Bank, and the Bank of England are particularly exposed. Collectively, they have extended hundreds of billions of dollars in short-term loans to both traditional banks and complex, unregulated “investment banks”….

If central banks are faced with a massive hit to their balance sheets, it will not necessarily be the end of the world. It has happened before – for example, during the financial crises of the 1990s. But history suggests that fixing a central bank’s balance sheet is never pleasant. Faced with credit losses, a central bank can either dig its way out through inflation or await recapitalisation by taxpayers. Both solutions are extremely traumatic.

Raging inflation causes all kinds of distortions and inefficiencies. (And don’t think central banks have ruled out the inflation tax. In fact, inflation has spiked during the past year, conveniently facilitating a necessary correction in the real price of houses.) Taxpayer bailouts, on the other hand, are seldom smooth and inevitably compromise central bank independence.

There is also a fairness issue. The financial sector has produced extraordinary profits, particularly in the Anglophone countries. And, while calculating the size of the financial sector is extremely difficult due to its opaqueness and complexity, official US statistics indicate that financial firms accounted for roughly one-third of American corporate profits in 2006. Multi-million dollar bonuses on Wall Street and in the City of London have become routine, and financial firms have dominated donor lists for all the major political candidates in the 2008 US presidential election.

Why, then, should ordinary taxpayers foot the bill to bail out the financial industry? Why not the auto and steel industries, or any of the other industries that have suffered downturns in recent years? This argument is all the more forceful if central banks turn to the “inflation tax”, which falls disproportionately on the poor, who have less means to protect themselves from price increases that undermine the value of their savings.

British economist Willem Buiter has bluntly accused central banks and treasury officials of “regulatory capture” by the financial sector, particularly in the US. This is a strong charge, especially given the huge uncertainties that central banks and treasury officials have been facing. But if officials fail to adjust as the crisis unfolds, then Buiter’s charge may seem less extreme.

So how do central banks dig their way out of this deep hole? The key is to sharpen the distinction between financial firms whose distress is truly panic driven (and therefore temporary), and problems that are more fundamental.

After a period of massive expansion during which the financial services sector nearly doubled in size, some retrenchment is natural and normal… Central banks have to start fostering consolidation, rather than indiscriminately extending credit.

In principle, the financial industry can become smaller by having each institution contract proportionately, say, by 15%. But this is not the typical pattern in any industry. If sovereign wealth funds want to enter and keep capital-starved firms afloat in hopes of a big rebound, they should be allowed to do so. But they should realise that large foreign shareholders in financial firms may be far less effective than locals in coaxing central banks to extend massive, no-strings-attached credit lines.

It is time to take stock of the crisis and recognise that the financial industry is undergoing fundamental shifts, and is not simply the victim of speculative panic against housing loans. Certainly better regulation is part of the answer over the longer run, but it is no panacea. Today’s financial firm equity and bond holders must bear the main cost, or there is little hope they will behave more responsibly in the future.

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  1. John

    Financial industry is an oxymoron.

    Which is better than being a moron. Taxpayers are the morons.

    In the US we have a Vice-Presidential candidate who belongs on the Jerry Springer show.

    You tell me how this will end.

  2. Stuart

    Came across this tidbit on another blog. Interesting.

    “Saw this on another board. ( It may be nonsense. It has been suggested that the word on the street is that the risk weight of FRE/FNM debt securities is about to be declared as 0%. Currently it is 20%. The idea is that, now that FRE/FNM are being taken over, a case could be made that the debt now has an explicit guarantee, so the regulators could, with a stroke of a pen, make the risk weight 0%. Reducing the Risk Weight to 0 would mean the banks don’t have to hold 20% in escrow (reserve), and it would make billions of dollars available in the active capital accounts of banks.

    If this is true it makes the financials a buy, due to them suddenly getting billions in active capital. “

  3. Francois

    “… financial firms have dominated donor lists for all the major political candidates in the 2008 US presidential election.”

    If we bear in mind that the average US federal politician spends 60%+ of his/her time campaigning for money, is there anything more that need to be said about the clout of the financial industry?

    Why do you think the normal working hours of session in Congress now starts Tuesday at noon and ends the Thursday at 15:00? One word: money!

    Compare that to 1965 when Congress had sessions from Monday 09:00h to 17:00h Monday to Friday.

    The reasons behind the “ossification of the political system” mentioned by Yves in Banana Republic Watch become a bit more logical (albeit deplorable) with this data point. How the hell can you think through a bill with so few hours devoted to thinking and working with your colleagues? Much easier to resort to extreme partisanship to wedge the voters and win elections while letting the lobbyists (the donors) write the particulars of the bills.

  4. CrocodileChuck

    In the early ’90’s the DoD, in recognition of the ‘Peace Dividend’ flowing from the collapse of the USSR, reasoned that the Military Industrial Complex would have to shrink-there simply would not be as much business (contracts) to ‘feed’ the number of players in the sector. They brokered ‘arranged marriages’ giving rise to the modern gene pool of LockheedMartin et al. I believe this was conducted under the auspices of a Richard B. Cheney. Perhaps Mr. Paulson should seek his advice on an analogous downsizing in the finance sector.


  5. doc holiday

    This story from Rogoff: "British economist Willem Buiter has bluntly accused central banks and treasury officials of "regulatory capture" by the financial sector, particularly in the US. This is a strong charge, especially given the huge uncertainties that central banks and treasury officials have been facing. But if officials fail to adjust as the crisis unfolds, then Buiter's charge may seem less extreme."

    >> Connects to this story (in your links) >>>> The stealth bailout, illustrated, in close to real time Brad Setser

    Re: I suspect that one of the reasons why PIMCO’s McCulley is worried about deleveraging is that central banks still disproportionately buy Treasuries. That has added to the mismatch between demand and supply in the market. Big existing balance sheets that until the crisis had a decent appetite for risk need to shrink. And some of the big balance sheets that are growing most rapidly right now don’t seem interested in credit market risk. Not right now.
    One result: the Fed has sold lots of Treasuries into the market to lend to financial institutions holdings somewhat riskier assets. Another is that the Treasury itself is poised to sell Treasuries and buy Agencies, effectively adding another source of balance sheet support for risk assets.

    >> Bueno!

  6. eh

    So far, the strategy of maintaining banking systems on feeding tubes of taxpayer-guaranteed short-term credit has made sense. But eventually central banks must pull the plug. Otherwise they will end up in intensive care themselves as credit losses overwhelm their balance sheets.

    This restates the obvious but is helpful because the question about the end game of all these alphabet soup lending programs by the Fed has slipped from the financial consciousness.

  7. Anonymous

    Since the Federal Reserve has already junked up its [relatively small, billion-dollar] balance sheet, enter now the Treasury program to buy MBS on the open market. Usgov, the largest financial entity on the planet, is gonna junk up its balance sheet, too.

    In broad-brush macro terms, monetizing junk is what’s needed to keep the Global Ponzi Economy inflating. Since the market stopped monetizing junk about a year ago, governments have now stepped in to pick up the slack.

    It’s not even a question of central banks “digging their way out through inflation,” as Rogoff observes. Rather, the very process of monetizing junk IS inflationary. They are ALREADY DOING IT.

    I’m no gold bug (haven’t owned metals since 2005), but I’m backing up the truck and shoveling in the shiny loot with a freaking snowblower.

    Death to the dollar!

  8. "Cassandra"

    All solutions that move the financial economy and the real economy back towards something resembling a sustainable intermediate equilibrium are profoundly deflationary.

  9. Anonymous

    The message will never be received by our political/financial run gov’t establishment. The ship will sink and only those with inside information/large international wealth will have access to the lifeboats. Its in the design.

  10. Matt Dubuque

    Great post Yves, but in terms of your statement “will anyone in authority take heed?” the answer is a resounding YES.

    Rogoff is extraordinarily influential with the FOMC; look at how many papers from the mainstream Fed branches cite his work extensively. And of course he plays a central role in EVERY Jackson Hole conference, the annual get together of the creme de la creme of central bankers hosted by Hoenig and his brilliant crew of folks such as Sellon and Hakkio of the Kansas City Fed.

    In support of Rogoff’s position, you will note that the GSE assets are now on the TREASURY’s books, not the Fed’s balance sheet.

    Additionally, although the Fed took on Bear Stearns toxic waste for a short while, they shortly thereafter forked over the ultimate liability on this toxic waste to the Treasury.

    Also, the Federal Reserve is less exposed in their swap arrangements at their Term Lending and other facilities than the ECB and the Bank of England in the sense that their swaps are generally for shorter terms than those of their counterparts; recall that the Bank of England’s swap facilities for mortgage collateral can extend well beyond a year.

    This key swap term (i.e. shorter maturities) has been insisted upon by the Fed as a way of minimizing their exposure. Recall that it was only recently that the Federal Reserve consented, with considerable reluctance, to having these swaps be more than a month in duration.

    Additionally, I draw your attention to Trichet’s pronouncement within the last week that, come February of next year (near the time when smackdown time is most likely to occur after release of AUDITED corporate financial statements), the ECB will be changing the terms of its swap arrangements for these classes of debt as well.

    So the Fed (and to a lesser extent the ECB) are very well aware of these risks and are seeking to navigate through these crises as well as they can without going under; the Bank of England, by contrast, seems the most vulnerable to Rogoff’s type of scenario among the three.

    It’s an extremely difficult scenario and the central banks can’t do it alone; they need the legislatures and fiscal authorities to pitch in as well.

    Matt Dubuque

  11. jm

    I don’t understand the statement that “central banks are taking on so much dodgy debt that they will put themselves at risk”.

    As Rogoff himself writes, “Faced with credit losses, a central bank can either dig its way out through inflation or await recapitalisation by taxpayers.”

    So how are they putting themselves at risk?

    Yes, Rogoff writes, “Both solutions are extremely traumatic.” Certainly. For the common people. But not for central banks or central bankers, or for any people who really matter (to central bankers, anyway). The elite own plenty of hard assets whose value will rise with inflation, and usually are investing with plenty of leverage and so will profit by the inflating away of the debt.

  12. Matt Dubuque

    With this timing, Rogoff may also be signalling the possible intention of the Federal Reserve to let the market determine a fair price for certain unnamed investment banks with enormous toxic waste on their books, rather than participating in another rescue operation.

    Readers will recall that the Bear Stearns operation was only done by the Fed under its “emergency” powers and there seemed to be general agreement at the Fed that they didn’t want to get in the habit of such operations without more explicit statutory authority from Congress.

    But that expanded authority was torpodoed for a variety of reasons by Barney Frank, Paulson and others in my view, so my sense is that the Fed may well surprise the markets and simply let a large investment bank with obstinate management fail.

    This is obviously a minority view that I hold (and I have expressed it earlier in this forum), but I get the sense that this may represent growing strands in Fed thinking.

    Matt Dubuque

  13. Matt Dubuque


    Your post ignores the surging tail risk of a deflationary burst.

    For some reason this concept seems metaphysically impossible for the clear majority of Americans to understand.

    I can’t adequately explain this conceptual shortfall stateside. My European and Asian friends grasp the concept very well, but I continually encounter large numbers of well-intentioned people in the US who cannot conceive of a deflationary burst in this country.

    Sad but true.

    Gold is not a hedge against deflation. Great bonds are.

    But you can’t tell that to most Americans.

    Matt Dubuque

  14. RealThink

    The ultimate critical point is not that, by trying to support the housing market, the Fed and other central banks can sink themselves. It is that they are accelerating the sinking of society.

    This issue can be appreciated only when viewed from the perspective of the physical limits to growth (or "from the top of Hubbert's Peak"). If you are aware of Peak Oil and Peak Everything, and that Easter Island's society could have avoided catastrophic collapse if they had stopped building moais in time, it is clear that the housing correction is not the biggest risk, but the biggest HOPE for the US. Because when house prices fall below construction cost, residential construction grinds to a halt. Which, from a Hubbert’s Peak-aware perspective, is exactly what the doctor orders. Because construction of more suburban and exurban McMansions is just digging further in the already deep hole most of the US population is in, as inevitably higher fuel prices will turn those homes into traps for their occupants.

    So, while the "Preferred Stock Purchase Agreements" part of the plan is completely justified and was necessary for the very reason stated by Paulson: ensure the GSEs can fulfill their EXISTING debt "held by central banks and investors throughout the United States and the world", it is the "GSE MBS purchase by the Treasury" part of the plan which is most unwise in the light of the physical limits to growth. Sure enough, that part, as Paulson says, would be necessary ""to further support the availability of mortgage financing for millions of Americans, (…because…) During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers." What Paulson (and practically the whole political/economic/financial establishment) cannot see is that a decrease in the availability of mortgage financing is a GOOD thing for Americans, just as a decrease in the availability of drug financing is a good thing for a junkie.

    Again, lack of mortgage credit -> house prices fall further -> eventually they fall below construction cost -> residential construction grinds to a halt, which, from the way and places houses are being built today, is a GOOD outcome.

    And if the US Treasury does not know what to do with the pile of cash it is sitting on (?), here are a few areas where it could be used instead:
    – Wind farm construction
    – Upgrading the electric grid to handle the above item
    – Electrifying the US freight railroads and replacing the double and triple tracks taken up in recent decades
    – Building electrified urban rail

  15. S

    matt d.

    markets down and gold down and oild down is an ominus sign for TPTB. Asset correlation on the downside.

  16. mmckinl

    Rogoff has it right … unfortunately it’s probably too late …

    If bad debt doesn’t take down the Central Banks the coming economic and financial melt down will.

    There is no way to delever the world’s debts smoothly with fractional reserve banking. You can’t issue more debt to solve insolvency.

  17. donna

    I’m pissed as hell that I’m bailing out multi-millionaires. I’m sure I’m not alone in that.

    The super rich are in for a comeuppance like they haven’t seen for a long, long time now.

  18. jm

    matt dubuque – Ironically, my current investment position is completely aligned with expectation of intense deflation. I’m fluent in Japanese and watched the progress and aftermath of their bubble burst very closely, and think it will be very difficult for the Fed to prevent deflation here.

    I repeatedly recommend to people that they read Richard Koo’s “Balance Sheet Recession”.

    But I’m getting increasingly uncomfortable with my position. Bernanke has, after all, sworn that he can prevent deflation by running the printing press. I’ve been betting that he’s going to underestimate how fast he’ll have to run it to avoid getting into the same “pushing on a string” position the Japanese got themselves into — but … am I right?

  19. doc holiday

    I have solved this problem, from deep inside my think tank, thus hank, et al take note:

    The solution to this systemic collapse is to make derivatives traders (all SIFMA members) responsible for “liquidiation only” requirements.

    This solution was brought about as a solution for oil, silver and gold speculation in the past thus, this is the obvious solution today for derivative speculation which uses the illusion of index bets to be unregulated by authority. Making these parties responsible for their speculation will stop this crap over night!

    Thank you for your patience and sorry to be so slow:

    Re: From a previous nakedcapitalism thread;

    FRIDAY, JUNE 27, 2008
    One Method to Flush Out Oil Speculators: “Liquidation Only” Restriction

    Daniel Dicker, a former oil trader writing at, contends that there is a way to test the hypothesis that speculation is influencing oil prices (a view that Dicker supports). Exchanges could impost a “liquidiation only” requirement, which was last used to break the Hunt brothers’ attempted corner of the silver market in the early 1980s (hat tip reader Michael).

    Note that while we believe that oil prices will inevitably move higher as supplies become more scarce, we have trouble believing a 50% price appreciation in five months is solely the result of fundamental factors. Reader Juan provided this quote from presentation by Frank Veneroso last year to the World Bank:

  20. doc holiday

    One more thing here, i.e, this is funny, because if the commodity market shut down derivative trade with synthetic swaps and linked bullshit, we could sure as hell start to value things a hell of a lot faster!!!!!

    Seriously! If this can happen with oil or gold, why not an index-backed-linked synthetic derivative??

    Re: The CFTC and the Comex (the predecessor to the Nymex) responded effectively by imposing “liquidation-only” trading — traders were allowed only to close existing positions and not permitted to initiate new positions.

  21. Matt Dubuque


    The collapse in stocks, commodities, gold, oil, real estate, corporate bonds, junk bonds and, frankly GSE debt COUPLED with a MASSIVE surge into the dollar AND Treasuries is completely consistent with the absolute unwinding of the financial system of the world, a tail risk scenario I have been urging others for several months now to prepare for.

    It is not an inflationary scenario. By stark contrast, it is completely consistent with a deflationary burst.
    It is bigger than the Fed. This is rocket science to most Americans for some reason.

    Watch the RAGING BULL MARKET in Treasuries continue. If it does, this lends support to my well-founded and competent concerns.

    The BEST hedge in a deflationary burst is the highest quality bonds you can find, according to Henry Kaufman, the original Dr. Doom. No exceptions. Period.

    Additionally, keep in mind that the correlation models at various prop desks assume a Gaussian distribution of outcomes.

    Fatal mistake.

    Matt Dubuque

  22. Anonymous


    What constitute "great bonds" these days?

    I don't discount deflation at all – i think we are clearly in a period of massive deflation (assets & debt).

    I think that the Fed & central banks will reflate in response – I think they are reflating right now. The problem they are having is that the hole in the bottom of the bucket is getting bigger even as they fill from the top.

    & to strain my metaphor, they are grabbing up all the various containers they have lying around & emptying them in first…but eventually they run outside & grab the garden hose.

    Our monetary authorities seem to be following Irving Fisher's game plan…but events have them constantly playing catch-up…


  23. mmckinl

    The problem with US Treasuries is that other countries may be forced to sell to prop up their own economies.

    There is a point at which Treasuries can implode as we are no longer the masters of our currency.

  24. CatGut

    jOHN…Right on dude! That Biden fella could write AND produce the jerry springer show. He could make good use of that mouse-eared sidekick too…freekyBama! Vice Plajiarist Joe Biden for Veep! Gotta love those lawyers.

  25. Dean

    There is a great deal of passionate commentary today. My simple question is this: If any of the observations in this article (as well as similar on the same topic) are true, how can we possibly be talking about a strong dollar?

    The theory that among the blind, the one-eyed is king does not impress me at all.

    In this environment High Order Capital Goods (HOCG)(such real estate,art, jewelry) that rely on cheap and abundant credit, are being destroyed (aka deflated). The LOCG (Low Order Capital Goods), food and staples are greatly inflated.

    I think that you quickly agree that no one needs discretionary items in every day life. The primary concern of the billions of inhabitants of this planet is the mundane, every day stuff.

    BTW, to consider bonds (a paper asset) as the antidote for a paper crisis is absolutely absurd.

  26. Matt Dubuque

    What are the markets saying?

    The most efficient markets in the world are saying that the 10-year Treasury bonds are a SCREAMING BUY. This market is one of the most transparent in the world, trading over 220 billion dollars per day and no market has tighter bid/ask spreads.

    Either you believe what the markets are shouting or you don’t. Either you believe in efficient markets or you don’t. I can’t force you to believe in the basics. That’s up to you.

    As I have said, the notion that enormous capital flows are SURGING into BOTH the dollar and Treasuries is rocket science to the average American. A profound and abiding epistemological impossibility to undo.

    But betting against those enormous capital flows could prove costly.

    Do those billionaires know something you don’t?

    Maybe this is a case of some firmly anchored inflation expectations that needs to be wiped out by the Fed.

    In my view, it’s payback time.

    Matt Dubuque

  27. Dean


    Displaying such certainty in this matter is a very dangerous and deeply flawed trait, not generally recommended under any circumstances.

    Invoking “herd mentality” is hardly an argument.

    Is a Bond an IOU or not? If it is why would you accept a promise of payment by anyone in this environment?

    P.S. Soros thinks market equilibrium is not defensible concept; it is however one taught in each and every one of our business schools.

  28. Anonymous

    Are US Treasuries a screaming buy ?

    At the moment all I can see is that the massive pile of IOUs run up by the US private sector is being shuffled onto the public purse. The F&F bail out just made the potential bill much bigger. The debt is still there. As far as I can see the US government and people have three options

    – Decades of austerity as they slowly pay down their liabilities.

    – Fire up the printing presses and use monetary policy to inflate away debts

    – Default

    The risk of options two or three
    (easily sold by ambitious politicians to a desperate public) makes anything but the shortest of the Treasury notes a risk.

    This crisis was started by people taking far too many one way bets. This is not the time to repeat that

  29. Matt Dubuque

    Fine. I know I can never convince some people of the dangerously surging risk of a deflationary burst.

    I’m not at all worried about that.

    I am concerned though about the extraordinarily skewed distribution of US people who cannot discuss a DEFLATIONARY BURST in the USA intelligently vs. those who live outside the country who can.

    Perhaps a spanking hard depression over the next 6 years will set them straight.

    Perhaps not.

    I just don’t want to hear the gibberish a few years from now that “no person could have known this could happen”.

    Matt Dubuque

  30. Dean

    Fair enough.

    Now, let me assure you (with some degree of certainty) that in hard depressions there is a certain hard asset category that has shown to outperform all other paper asset categories. It did it in the last depression at a ratio of 25:1.

  31. Anonymous

    Regulation or wiping out the shareholders will do nothing to fix the excess produced by greed and by bending the rules. Jail terms to CEOs would but I don’t see it happening…

  32. Dave Raithel

    Stuart of 1:12am observed he’d read: “The idea is that, now that FRE/FNM are being taken over, a case could be made that the debt now has an explicit guarantee, so the regulators could, with a stroke of a pen, make the risk weight 0%. Reducing the Risk Weight to 0 would mean the banks don’t have to hold 20% in escrow (reserve), and it would make billions of dollars available in the active capital accounts of banks.” So the pump is primed; but the guarantee is only as good as the reliablity of the tax base to pick up the losses should they occur; and they do occur if the priming fails? And if the priming fails, there is no reliable tax base…? (Without documentation, I am pretty sure I’ve read Paulson trying to say both that the guarantee is explicit and there really isn’t one…)

    Casandra at 7:43am wrote: “All solutions that move the financial economy and the real economy back towards something resembling a sustainable intermediate equilibrium are profoundly deflationary.” Deflation makes people pay of debts with more valuable money? So this benefits debt holders, not debtors….? But the real economy consists of stuff (food, oil) and services (like haircuts and dental work); and the financial economy consists of claims for real stuff in the future in exchange for some real stuff in the now. Why should I give you (well, editorially you, not you literally) something more valuable in its future than it is in the now? Seriously, these are the kinds of questions I get in my head when I read this stuff….I mean, that may be what it takes to fix finance capitalism, or the circumstance of people holding claims on the future, but is that the ONLY option?

  33. Anonymous

    I believe the bailout of FNM and FRE is the olive branch to countries that poured enormous amounts of money into both GSE’s over the past few yrs upon a reassurance that the US govt would stand behind the implied guarantee. And the reason the money went into the GSE’s to begin with was because Paulson, Bernanke et al realized that the US could not weather a further slow down of Treaury purchases by those very countries. Therefore, better to make good on the paper those countries poured money into at the assurance of our Treasury Secretary et al, than suffer the consequences. What consequences? How about those very angry and very much poorer countries (hypothetically due to NO FNM/FRE bailout)selling Treasury bonds into the open market as they demand their money back and lump the pain back on the US. What a better way to disguise the cost of this enormous hand job than to tell the lumpen US citizen that the bailout is to keep people in the houses they never could afford to begin with.

  34. Dean

    I think David and Ano10:43 make good points.

    Indeed there is an effort @ CB level to satisfy the debt holders , that is both sincere and well coordinated.

    Question is whether such effort will suceed in creating a deflationary environment ala Dubuque.

    At the risk of finding my reply a bit speculative, the simple answer is No.

  35. Invictus

    I agree with Matt Dubuque and appreciate your insightful comments. I am mostly in treasuries and cash until there is a screaming buy elsewhere. I also second that the next six (give or take) years will resemble nothing that anyone today envisions. However, how else really does one prepare for a depressing depression?

    Just ask or look around and see how hated treasuries are. The treasury bubble will march on until it is unanimous amongst the masses that treasuries are the best asset class since they are “riskless” even if yields are barely better than holding cash. It is a different ballgame for the investing community then the last 80 years.

    Yves, enjoy yourself at Columbia during the Blogs, the Economy, and The Mainstream Press event your a speaking at.

    I personally put more faith in your commentary then I do the WSJ or any mainstream media economic writer.

  36. Dean


    I hope that I speak for other as well in that we are delighted to hear your unbiased (kind of convictus) opinion on this matter.

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