It’s interesting to see the ideas that come and go while we collectively wait around like Wile E. Coyote for Isaac Newton to take control of the colossal mortgage mess. The Fed, for example, can keep cutting interest rates to negative infinity and it still won’t make the mortgage-backed securities worth anything. We could let the free market sort out businesses which lack the sense and/or leadership to make sustainable choices, but it looks like free-market fundamentalists only care about privatizing profit. As far as I’m concerned if we need a painful readjustment to get back to stable growth based on solid fundamentals then so be it. The pain may even spur some sensible limits on the now-discredited theory that a deregulated financial services industry will police itself.
But who am I kidding. In a Democratic country any painful readjustment always means extra pain for whoever controls fiscal policy, which means that most governments will do practically anything to avoid it. If you’re wondering how far they might go, how about buying the entire reeking CDO pile with tax dollars and handing it off to the next administration in the form of debt.
Central banks and governments in advanced economies will be forced to buy mortgage-backed securities within the next few months to stop the credit crisis, according to a former chief economist of the European Bank for Reconstruction and Development.
“Central banks will be managers for years to come of rather interesting portfolios,” predicted Professor Willem Buiter of the London School of Economics, as the Federal Reserve and the Bank of England sought to play down conversations officials have had regarding purchases of mortgage-related assets.
The major players are denying the story, as well they should. The mortgage-backed securities are literally worthless. Most firms can’t sell them at any price, and even if they could most won’t because selling a large enough batch would establish a real value for the toilet paper securities that everyone else is holding. A honest valuation would reassess a huge part of some large firms’ holdings to next to nothing, and down comes the entire house of cards.
Thus, according to the Financial Times, the central banks are thinking about literally buying nothing. The idea is to fill a huge CDO-sized hole in the balance sheets of the most irresponsible firms with taxpayer cash. That seems even worse than a bailout. It’s like buying a disease. Worse, it rewards the most irresponsible players and does nothing at all to fix the Greenspantarian system of deregulation and bailout that encourages these damaging bubbles in the first place.
Anyhow, the FT report is certainly true in a literal sense; policymakers would be negligent not to weigh every possible option for managing a crisis. We should reserve impeachment, tar, feathers, rail and pillory for the unlikely event that the idea was something more than one bullet added to a list for the sake of completeness.