Here's a question for you: should concerns about moral hazard apply to central bank reserve managers and sovereign wealth funds? The question arises after recent comments from Yu Yongding, a former advisor to PBOC, suggesting that a failure to redeem GSE debt at par would be "catastrophic". Implicit in the comment was the threat "give us our money back or else."
Now, the last time that Macro Man checked, no one stood with a gun to PBOC's head and told them to buy $50 billion a month to keep the RMB artificially weak. (He is willing to concede that Hu Jintao may well have done so, but it's not quite the same as Hank Paulson standing there with his finger on the trigger.) Similarly, Macro Man is not aware of any irresistible force that compelled Voldemort to buy Agency debt, thereby collecting the "free" yield premium over Treasuries.
Yet here we are, with Fannie and Freddie on the ropes, and comments from Mr. Yu that sound like nothing so much as Paulie from Goodfellas: **** you, give me my money.
As a US taxpayer, Macro Man is thrilled with the notion of bailing out the GSEs so that serial currency manipulators can be fully compensated for their nefarious activities. (As an aside, can any readers confirm or deny whether foreign CBs pay US income tax on the Treasury and Agency debt that the Fed holds in custody for them?) This is particularly the case given that the disruptive activities of PBOC, CBR, etc. in private-sector currency markets make it more difficult to earn the money which generates his tax bill...which now will, apparently, be spent to compensate these self-same serial piss-takers.
Policymakers the world round have been quite keen to tell those of us in the private sector that we must reap what we have sown (even if, ultimately, bail-outs are inevitable in the name of "avoiding systemic risk"); do they have the cojones to say the same thing to their official counterparts?
Elsewhere, yesterday's little ditty proved to be prophetic, as the latest dismal print from the German ifo survey has prompted the latest bout of dollar strength, taking the buck to new highs for the year against the AUD and GBP, and new trend highs against the euro.
Whether this can be maintained in the near-term remains to be seen, of course; at the risk of missing the forest for the trees, Macro Man is retaining a fairly nimble investment posture until he starts seeing things a bit more clearly.