Financial sector revivification scheme: theory

[c1ue]

It seems very clear to me now that the way the US will take care of its present financial sector insolvency is as follows:

1) Identify a group of key FIRE institutions including:

Bank of America
JP Morgan

2) Use said key institutions to acquire failing members and 'provide stability'

3) Use Fed and Treasury to absorb bad debts from failing FIRE institutions via a combination of term lending, writeoffs, accepting bad collateral as 'good', and straight Treasury purchases. Scavenge 'good' parts to bolster the balance sheets of key FIRE institutions.

The troubling questions then arise:

a) If trillions of dollars are being spent to 'term lend', 'accept MBS collateral', 'Keep Fannie/Freddie solvent', and so forth - can the US government also fund infrastructure investment?

On the one hand: in for a penny, in for a pound. Why not double the deficit and do both?

On the other hand: infrastructure investment requires commodities. The sudden flood if increased US debt theoretically should depress the dollar, thus making infrastructure related commodities like steel more expensive. And these commodities are largely produced (and consumed) outside of the US. Said extra currency account deficit pressure can't be good.

b) The various government actions are making good the agency and corporate bonds which foreign CBs are holding. But is there any reason for these institutions to continue to buy more such securities?

Is it possible that the combination of dollar depreciation and higher interest rates from a) and/or b) would derail the next bubble as well as the US economy for the next several decades?

A high inflation, high interest rate low growth American version of the Japanese 'Grey Decade'?

[phirang]

It seems very clear to me now that the way the US will take care of its present financial sector insolvency is as follows:

1) Identify a group of key FIRE institutions including:

Bank of America
JP Morgan

2) Use said key institutions to acquire failing members and 'provide stability'

3) Use Fed and Treasury to absorb bad debts from failing FIRE institutions via a combination of term lending, writeoffs, accepting bad collateral as 'good', and straight Treasury purchases. Scavenge 'good' parts to bolster the balance sheets of key FIRE institutions.

The troubling questions then arise:

a) If trillions of dollars are being spent to 'term lend', 'accept MBS collateral', 'Keep Fannie/Freddie solvent', and so forth - can the US government also fund infrastructure investment?

On the one hand: in for a penny, in for a pound. Why not double the deficit and do both?

On the other hand: infrastructure investment requires commodities. The sudden flood if increased US debt theoretically should depress the dollar, thus making infrastructure related commodities like steel more expensive. And these commodities are largely produced (and consumed) outside of the US. Said extra currency account deficit pressure can't be good.

b) The various government actions are making good the agency and corporate bonds which foreign CBs are holding. But is there any reason for these institutions to continue to buy more such securities?

Is it possible that the combination of dollar depreciation and higher interest rates from a) and/or b) would derail the next bubble as well as the US economy for the next several decades?

A high inflation, high interest rate low growth American version of the Japanese 'Grey Decade'?

The US could issue foreign-owned bonds to finance its infrastructure development.

Also, if things get really bad, the US could just start another war and scare the beejuzs out of its allies and coerce them to buy treasuries.

[sn1p3r]

because God forbid we re-learn how to do things for ourselves and become self sufficient...

[c1ue]

The US could issue foreign-owned bonds to finance its infrastructure development.


Unless said bonds also conveyed ownership interest, wouldn't this be the same as just issuing more Treasuries?

Or more importantly, would there be capacity and demand for massively increased amounts of either infrastructure bonds and/or Treasuries?

We're looking at hundreds of billions for the financial sector and likely also hundreds of billions for infrastructure.

[phirang]

Unless said bonds also conveyed ownership interest, wouldn't this be the same as just issuing more Treasuries?

Or more importantly, would there be capacity and demand for massively increased amounts of either infrastructure bonds and/or Treasuries?

We're looking at hundreds of billions for the financial sector and likely also hundreds of billions for infrastructure.

If it gets that bad, we'll give them "ownership".

[GRG55]

Unless said bonds also conveyed ownership interest, wouldn't this be the same as just issuing more Treasuries?

Or more importantly, would there be capacity and demand for massively increased amounts of either infrastructure bonds and/or Treasuries?

We're looking at hundreds of billions for the financial sector and likely also hundreds of billions for infrastructure.

Bonds backed by specific physical assets that generate a revenue stream [like toll roads or water works] may prove more attractive than bonds backed by "the full faith and credit" of the US Government. Foreign capital [from places like the Middle East, Asia and even Africa] will continue to place value on the security provided by the US legal system.

[marvenger]

sounds very plausible to me. They could create new currency, massive default, but then then the rest of the world may not be too interested supplying oil or anything else, I think I read on a post here the US is 100% reliant on imported flu vacines, so there's some very important things the US has got to keep trading for a while, and the ever present US armed forces to help this trade along.

yeah, I agree long drawn out recession seems the most probable outcome as the rest of the world will slowly be trying to rid itself of dependence on US demand and the US is trying to rebuild its supply with constrained capital and trying to roll out new technologies I guess. Rest of world wont want to resort to military solution at first, but if they get stronger they might, and I guess US would want to get in there preemptively.

[marvenger]

Foreign capital [from places like the Middle East, Asia and even Africa] will continue to place value on the security provided by the US legal system.

I think this is right but currently and in the near future the attraction is probably not as great as it once was.