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QE2-as-bank-bailout continues with a Friday op-ed by Andy Kessler, a former hedge-fund manager and author of â??Eat People"â?And Other Unapologetic Rules for Game-Changing Entrepreneursâ?.
As weâ??ve noted before, thereâ??s something odd about the Federal Reserveâ??s second round of quantitative easing. Instead of trying to flatten the US yield curve, the Fedâ??s Treasury purchases look like theyâ??re almost aimed at steepening it.
Why? Hereâ??s Kesslarâ??s theory via the Wall Street Journal:
Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks.
The dreaded double dip.
The scary part in all this â?? also as FT Alphaville has pointed out before â?? is that banks have been lowering their loan loss reserve provisions (the stuff they set aside for bad loans) in recent quarters. Which means should a double-dip come they wonâ??t be as prepared as they could be. In fact you could argue that US banksâ?? 2010 third-quarter earnings were largely driven by falling provisions.
Check out these charts â?? from Barclays Capital:
No wonder the US wants more stress tests.
Kesslarâ??s solution by the way, is this:
The Fed may have to act quickly. It canâ??t reprise the 2009 bailouts, which failed when banks wouldnâ??t sell their distressed mortgage-backed securities because they didnâ??t have enough capital to stay solvent. No politician would agree to bailouts anyway. This time, the Fed should do what it didnâ??t do in 2008-09: detoxify and recapitalize the big banks. The Dodd-Frank banking reform provides the authority for the Fed and the Federal Deposit Insurance Corp. (FDIC) to do this.
Writedown. Recapitalise. Rebuild.
We should have a bumper sticker knocked-up.
Related links: Unwinding the US Treasury trade â?? FT Alphaville The lonely long bond gets lonelier - FT Alphaville Shadow bank losses â?? FT Alphaville
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