Currencies and the Bad Bank Plan

On Friday, in my Daily Currency focus for FX360.com, I talked about the 3 Big Threats to the US dollar this week. One of them was a bad bank plan. Wednesday morning, Dow futures and higher yielding currencies are up sharply on news that Obama’s Administration has prepared a plan to create a bank that would absorb toxic bank assets. Here’s a recap of what I wrote on the plan and read the rest of the report for the other 2 major threats facing the US dollar.

Bad Bank Plan - There is no question that equities are still leading currencies for the time being and over the next few weeks, the Obama Administration could announce a plan to create an “aggregator bank” that would soak up the bad debt sitting on bank balance sheets. This would free up capital for the banks which would hopefully encourage lending and restore investor confidence. If Obama announces a bad bank plan, it could squeeze shorts in financial stocks and take the entire index higher. Since currencies are still moving in lockstep with equities, a rebound in stocks could help reduce risk aversion and take some of the steam out of dollar rally.

Comments

[Prudent Man...:]

There is a Bad Bank. It is the FDIC. I don't understand why we need any new bureaucracies (except to throw money to Goldman Sachs) when there are sufficient agencies and regulation available now. All that has to be done is to make those agencies functional and enforce and/or beef up the current laws, if you can get around this dysfunctional unterm-limited Congress.

When I was a consultant with the FDIC we had Bank of America in our sights to close in 1987 but they worked out of it. The FDIC, compared to most bureaucracies, did the job very well in a very stressful banking climate. They know how to do it, have experience doing it and have done it right, something neither the Fed or Treasury have been able to do.

In 1982, unemployment was 10.9, we cut all taxes and it worked. That is what we should do now and scrap the spending programs but use some of the TARP money to fund the FDIC not specific banks.

National Banking and the other disingenuous laws passed by Congress have created a monster. Too big to fail is too big. The only people who believe in saving these failed institutions are the ones who profit by it and the politicians who allowed them National Banking and National Failures.

Jan 28 12:06 PM

[Vox Rationalis:]

"In 1982, unemployment was 10.9, we cut all taxes and it worked."

Nonsense. First off, taxes were raised in 1982, after having been cut in 1981. Look up TEFRA. But more importantly, the Fed-caused recessions of 1980-1982 were deeper than anything seen since the Great Depression, and the huge amount of excess and underutilized capacity in the economy in 1982 set the stage for a long-term expansion. Just as fiscal policy didn't cause the recession, neither did it end it.

Reagan's fiscal policy did work, however, to more than double the national debt (in real terms) during Reagan's two terms.

Jan 28 02:55 PM

[Glen L.:]

B.S. Detector - I agree that the Fed caused the recessions of 1980-82, but it sounds like you're coming strictly from an anti-Republican bias. When you say that fiscal policy was not a causal factor, you seem to discount the fiscal policies of Nixon-Ford-Carter that led to the stagflation that Voelcker was trying to cure. Of course we can do an infinite regression to find out where the original problem of the business cycle lies... I vote for the Fed. In any case, it is indisputable that the Fed and the politicians are bedfelllows. Fiscal policy and Fed policy are inextricably intertwined.

Jan 29 10:46 PM

[Vox Rationalis:]

Glen - I'm not at all sure why you're picking a fight here, unless you're just trying to defend all things Republican. If you read the first post and my response, you'll see that the only thing I disputed was the statement "In 1982, unemployment was 10.9, we cut all taxes and it worked." I wrote nothing about the causes of the ills of the 1970s, though I have fairly strong opinions about that.

The statement I responded to puts all credit for the 1980s expansion at the door of tax cuts, which is absurd. The table was set for a massive expansion which would have occurred with or without the 1981 tax cuts. Even if significant credit is given to the tax cuts as a growth factor, arguments that the actual mechanism was massive deficit spending (a la Keynes) are easy to make.

That the tax cuts were a major cause of the unprecedented growth in the national debt is indisputable.

Just for the record, here are the percent changes in the national debt, adjusted for inflation, of each 4-year Presidential cycle ending with the last FY budget passed during each term:

Kennedy-Johnson 1965: 4.6%
Johnson 1969: -2.6%
Nixon 1973: 5.4%
Nixon-Ford 1977: 11.0% (includes the extra transition quarter)
Carter 1981: -6.1%
Reagan 1985: 54.3%
Reagan 1989: 36.9%
Bush I 1993: 30.2%
Clinton 1997: 11.1%
Clinton 2001: -2.6%
Bush II 2005: 24.2%

(source: derived from EROP tables B-78, B-60)

Do these data merely demonstrate an anti-Republican bias, or do they show something meaningful?

Jan 30 08:49 AM