Tuesday, November 25, 2008

Lets nationalize everything.

I can't keep up; I need help.

Here is another mad idea; this time from the FT. Central banks should buy up "underpriced" assets. No, we are not talking toxic mortgage debt, we mean all kinds of assets, including equity.

"Since the downturn is now in the broader economy and no longer confined to the toxic end of debt, the best way to put cash into the pockets of consumers and companies is for the world’s main central banks together to buy mainstream securities, unlike under the initial US troubled asset relief programme. But these must be targeted to relieve the critical credit blockages impeding recovery. Many of the assets discussed below are now at the lowest real prices seen in decades. The influx of cash and credit will regenerate global activity, increasing the real value of most of these assets. In due course, the central banks will be able to sell back the assets to the private sector at an overall profit. The timing of such sales can be designed to stabilise the next boom.

A good example of this kind of unorthodox action is the Hong Kong Monetary Authority’s successful defence of the currency peg in the 1997-98 Asian crisis. The HKMA intervened in the currency market, but more important were its purchases of Hong Kong equities, which speculators had sold short. These later made a net profit for the HKMA of US$14.1bn. The fact that many asset prices are far below fundamentals creates a parallel opportunity in the current global crisis."

When a governmentn starts buying equity it is called nationalization. It is what socialists do. It has been tried many times before, and it always ends up giving the same sorry result.

However, do we really need to explain spell this out? Sadly, I think so.


  1. Alice, I think socialism is where the UK is going. Maybe it will be a bit difficult to explain why some people's houses are larger than others!
    You know. I know. Everyone who reads your blog knows. UK is kaput.

  2. so come on Alice, what do you think of James Hamilton's idea that the Fed should buy TIPS?


  3. Like the nationalization of the Swedish banks in the 90s?

    Nationalize the banks and strip off the illiquid assets. Sell the rest to the highest bidder when the economy is back on track, while managing and aggressively reducing long-term losses on the bad assets?

    Socialism ftw!

  4. I'd have thought the FT would know better than to use the phrase "undervalued" so carelessly. They need a lesson in markets and price signalling.

  5. Alice - it's a pity you didn't feel you wanted to comment on Prof. Hamilton's idea. For what it's worth, here's what a lesser mortal thinks. I think the Fed buying underpriced TIPS is a stroke of genius. I think there will be no deflation - "we'll do whatever it takes, whatever the cost" etc etc. I think there will be a race to the bottom by the dollar and the pound. The race will be won by the pound. I think in the meantime gold should be bought on any reaction towards $700, hoping it doesn't break above $850 beforehand.

  6. Nationalize the banks and strip off the illiquid assets.

    Nationalize the bank, lend money to the government, strip it off as an illiquid asset... nice way to repudiate debt.