Threatened by the worst economic outlook in a quarter century, officials arrived in Washington still without the broad- based strategy that investors were seeking, raising the risk of further turmoil if their remedies disappoint. Among the options being considered: a proposal by U.K. Chancellor Alistair Darling for nations to guarantee lending between banks, a suggestion that U.S. Treasury Secretary Henry Paulson hasn't ruled out.Liquidity vs. Capital
Unprecedented interest-rate cuts and bank bailouts failed to quell panic in markets, leaving policy makers under pressure to pull even more policy levers.
"Global policy makers have their backs against the wall -- they have nowhere to run, nowhere to hide," said Marco Annunziata, chief economist at Unicredit MIB in London. "Do not underestimate how hard they are going to fight back now."
While the Treasury still aims to buy troubled mortgage- backed securities from financial institutions, a direct capital injection would offer more immediate relief by giving banks quick access to funds they could then lend out.
The U.K. is already engineering a 50 billion pound ($87 billion) strategy to partly nationalize at least eight British banks. Japanese lawmakers are also considering reviving a law that expired in March that would allow them to inject public money into regional financial companies.
"The financial system doesn't need more liquidity it needs more capital," said Jim Bianco, president of Bianco Research LLC in Chicago.
"The financial system doesn't need more liquidity it needs more capital."
Ding ding ding. We have a winner. Unfortunately the only plan in the US is to rob taxpayers of $700 billion to provide liquidity. That plan is changing into one that may provide capital, but taxpayers are still on the hook.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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