Central banks (both the Fed and the ECB) are ‘considering’ rate cuts, but they cannot even enforce their own interest rates in the money markets, as these soar again. Anyway, it’s still probably a good idea. Inflation risk seems tame compared to what can happen in the markets. In the meantime, we have an interesting thought from George Soros. Why didn’t anybody think of that before?
Soros: Banks Need Cash, Not Bailout
Wednesday, October 1, 2008 4:07 PM
- The bulk of whatever funds the government provides for the final bailout package should be used to recapitalize banks, and not to buy banks’ bad assets and park them in a government-owned fund, says Soros Fund Management Chairman George Soros.
- “Funds injected at the equity level are more high-powered than funds used at the balance sheet level by a minimal factor of 12,” Soros writes in the Financial Times.
- “In practice, the effect would be even greater because the injection of government funds would also attract private capital,” Soros notes.
- “If the funds were used in this way, the recapitalization of the banking system could be achieved with less than $500 billion of public funds,” Soros says. “The result would be more economic recovery and the chance for taxpayers to profit from the recovery.”
- Under Soros’s plan, bank examiners would analyze each bank’s finances to determine what is needed. Those banks unable to raise sufficient equity from the private sector could turn to Treasury, which would then invest in preference shares issued under terms that allowed banks to continue lending at a profit.
- These shares would be tradeable with their value warranted by the government.
- “Private investors, including me, are likely to jump at the opportunity” (to buy them) Soros says.
- Edmund Phelps, Director of Columbia University’s Center on Capitalism and Society, agrees that the main prong of any “rescue” plan must be recapitalizing the banks.
- “Right now our banking industry is barely operational,” Phelps writes in The Wall Street Journal.
- “Whatever the corrective surgery indicated, the priority is to get the system operating again.”
Paul Krugman has also continually stressed that it’s not a liquidity crisis but a capital crisis. Solutions need to be directed at that.