The International Monetary Fund, despite being a global organization, has pittance for a budget. It was designed to help save dick, third world dictators from the fallout of their poor leadership, by pumping low quality loans into their banking systems.
As you can imagine, it doesn’t take much money to completely wash a place like Zimbabwe in currency worth more than the cumulative of 10 years of their gross GDP.
My point is this; the latest EU salvation announcement – that the IMF is going to bail out the world’s largest combined economy – is dumb.
But first things first; where have we heard this storyline before? Wasn’t leveraging a meager reserve balance into a miracle homerun supposed to be the faculty of the EFSF? So this announcement, foremost, is an indirect acknowledgement that the EFSF plan is effectively dead. Why else repackage literally the exact same idea and try to feed it to the public like it’s shiny and new?
Second, where is the IMF going to get that kind of money? Last I checked, their budget sucks. If they were to have any hope of actually raising the kind of money they’re talking about, they definitely need a bigger set of deposits. Who’s giving them those? Germany isn’t giving money directly to Greece; they’re not giving money to an institution that’s going to give money directly to Greece either. The U.S. sure as hell isn’t going to associate with this; you want to see conservatives start setting Executive Branch Office buildings on fire? Try to force the U.S. to accept that kind of liability for Europe’s little welfare mess.
And then they need to actually get anyone to loan to them. Who’s going to do it? The entire EU together couldn’t garner enough interest to raise 600 billion euros. The IMF only expands liable counterparties to include the U.S. (great budget to absorb shock there…) and some emerging economies – the same emerging economies that have heretofore refrained from loaning money to Europe!
Get over it, guys. Nobody is going to invest money into saving Europe just so Europe can live comfortably for 2-4 more years before this issue rears back up again. There is too great an expectation (totally justified) that Europe will screw over anyone who puts their faith in them, in order to buy some more time. Look at the labor movements that are welling up in places like France and Greece, and you will understand why no sane man or women will be investing in any of these hairbrained schemes to “magically leverage away” all of Europe’s problems.
The rest of the planet would love to have the same things happen to their debt. Everybody can come up with much better uses for their own resources than to throw it into that bottomless pit.
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Cain,
off your topic, but wanted to run this by you.
QE2 was failure in getting economy rolling in that equities marched higher, while bond yields blew out – not exactly what Bernanke wanted.
Something I’ve been mulling over is the Gross postioning in MBS (I dont care about his last trade – evryone has a bad one).
Perhaps Fed does buy up MBS, forcing fixed income managers to buy up treasuries, thus keeping yields down and even moving lower. This action however, would not free up capital to levitate equities. Ben’s biggest frustration is not getting people to refi at lower rates and get the savings into the economy.
Can it be different this time?
To me it almost seems like QE is a “go”. Headlines are crappy from ECB overnight deposits, to earnings misses. Not to mention Ben asked PDs last week how liquidity was. To me he’s telegraphing, just how does it roll out.
If I was in Gross’s position, I would have done the same thing. He couldn’t count on the run in treasuries that happened; and all indications are that U.S. treasuries will be a bad trade at these yields, and the yields where he sold out.
I still don’t think Ben eases, because of what it would do to oil, and by extension the economy. It’s a catch 22 – his action invokes the opposite effect.
Good point on the Oil and economy, but if it is to “save the system” due to Eurotrash concerns maybe he does it anyway?
Other thing is he may not act until we are off 20% from here, which would translate into lower crude as well. Then his hand was “forced”.
Any credence to the UBS report yesterday of a $10T wall in Feb thus allowing Greece to exit and a wagons circled on the remaining members. $10T maybe in lala land, but just looking at concept here.
As I’ve been saying for over half a year now, I think it’s the later.
The Fed isn’t autonomous. I know they say they are, but no one’s autonomous when they’re on the receiving end of Molotov cocktails. If the Fed prints, and then oil spikes, they will be universally hated and you would see Congressmen getting very interested in what the hell the FOMC has been up to.
But then, just because that makes sense doesn’t mean Bernanke isn’t going to run around setting things on fire anyway.
LOL love the last comment .. cheers