Wednesday, January 21, 2009

Utilitarian jumping of the capitalist shark

(Sacré bleu! When one of the honchos at Pimpco starts to parrot the long held position of Nassim Nicholas Taleb you know we're jumping the nancy capitalist shark. -AM)

By Mohamed El-Erian
Published: January 20 2009 19:32
Financial Times

Over the next few weeks, the US government will be forced to do more. Further capital injections are likely to be supplemented by ambitious attempts to remove in one swoop the overhang of toxic assets. This can be done by aggregating them into a new government-supported institution that benefits from abundant and permanent capital. The institution would liquidate the toxic assets in a gradual and orderly fashion. This sensible approach is costly to the taxpayer and it can be sustained only if accompanied by meaningful steps to ensure that banks do not return to their bad habits – thereby accelerating the government-inspired march towards a “de-risked” and slimmed-down financial system. Governments will be more than strict regulators; they will be meddling partial owners.

Under the utility model, banks will perform narrow functions within well-defined and constrained leverage. They will be less risky, but also less innovative and less able to lend imaginatively. This will inevitably reduce the speed limit for medium-term economic growth in the US and beyond. It is too late to stop the transformation of banks into utilities. But it is not too late to start working on a subsequent reinvigoration in the context of a more effective regulatory structure.

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