By Kathy Lien, An SA Author.
Over the past few days, the markets have shrugged off the government’s bailout of AIG (AIG) and a flush of liquidity from central banks around the world. No matter what the Federal Reserve or the US Treasury tried to do, they failed to please the markets. However in the last few hours of trading Thursday, a possible resurrection of the Resolution Trust Corp [RTC] sent the stock market surging and gold prices plunging. New traders may wonder what the RTC is and how it can help the markets.
The RTC is essentially a government owned asset management company that is tasked with taking over and eventually liquidating faulty assets. It was first created as a result of the Savings and Loans crisis of the 1980s. For the readers of the Wall Street Journal, former Fed Governor Paul Volcker, former US Treasury Secretary Brady and former US Comptroller Ludwig wrote an opinion piece on Wednesday calling for the current Administration to resurrect the RTC.
The idea was then floated around by current US Treasury Secretary Paulson Thursday afternoon, triggering the sharp reversal across the financial markets. USD/JPY traded as low as 104.00 just a few hours before talk of the RTC hit the newswires and afterwards, it rallied up to 105.78. However the more important question to ask is whether or not an RTC will help. The problem in the financial markets right now is not with lending but with letting money go. No one is willing to take on risk, but if the RTC is willing to do so and keep it in house for months or even years before liquidating so as not to flood the markets with bad assets, it can help. According to the opinion letter in the WSJ, if the RTC buys the bad debts, it accomplishes the following:
1. Restores Liquidity
2. Orderly Liquidation of Troubled Paper
3. Reduces Foreclosures because the Agency Would Manage Mortgage
4. Can Help to Revive Banks Stuck with Troubled Paper
Is the US at Risk of Losing its AAA Rating?
However the big danger of inundating the US government with bad debt at a time when they have spent a tremendous amount of public funds to bailout companies like AIG is the risk of the US losing its AAA credit rating. On Wednesday, S&P said that “there’s no God-given gift of a AAA rating, and the US has to earn it like everyone else.” Although the S&P followed that statement up by saying that they are not at risk of losing their rating, we certainly believe that with the US, they will be more reactive than proactive of downgrading the government’s debt if needed. The consequences would be catastrophic if the US gets downgraded, but Americans cannot have their cake and eat it too. Not only will US tax payers have to pay for this eventually, but 15 years down the line, Medicare obligations will balloon and if the US government doesn’t get its balance sheet into shape by then, the consequences could be even more severe.
Fire up the Printing Presses?
This is perhaps the reason why the Federal Reserve may consider firing up the printing presses. Along with major central banks from around the world, the Fed has added $247B in a coordinated liquidity injection this morning. To pay for this, they are selling an additional $100B in short term debt, which in essence sterilizes their efforts. If that doesn’t work in stabilizing liquidity, the Federal Reserve can always print money. Printing money has its problems as well, since accelerates inflationary pressures and with inflation just beginning to trickle lower, the Fed may not want to take this gamble yet.
Related Posts :
The Fed is Considering Creation Of A Repository For Banks' Bad Debt
Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.
You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.
No comments:
Post a Comment