Fed Intervention Policy

17 March 2008 at 4:44 am 2 comments

| Steve Phelan |

Greg Mankiw reports that Myron Scholes has a novel idea to fix the credit crisis – rather than simply guaranteeing to underwrite asset losses (as they have with the JP Morgan/Bear Stearns ) Scholes proposes that the Fed takes senior equity and debt positions in a distressed bank thereby improving the capital adequacy ratio, and thus preventing a credit freeze which would damage the real economy. I like it – what do YOU think?

Entry filed under: Business/Economic History, Evolutionary Economics, Former Guest Bloggers. Tags: .

Debt Bites Back Economics and the Rule of Law

2 Comments Add your own

  • 1. Alison Kemper  |  17 March 2008 at 8:32 am

    James Hamilton makd the point Friday (before thefall) that much of what is supposed to look like debt has started to smell a lot like equity.

    He quotes Steve Waldman :

    The distinction between debt and equity is much murkier than many people like to believe. Arguably, debt whose timely repayment cannot be enforced should be viewed as equity. (Financial statement analysts perform this sort of reclassification all the time in order to try to tease the true condition of firms out of accounting statements.) If you think, as I do, that the Fed would not force repayment as long as doing so would create hardship for important borrowers, then perhaps these “term loans” are best viewed not as debt, but as very cheap preferred equity….

    The Federal Reserve is injecting equity into failing banks while calling it debt. Citibank is paying 11% to Abu Dhabi for ADIA’s small preferred equity stake, while the US Fed gets under 3% now for the “collateralized 28-day loans” it makes to Citi…. I still think this all amounts to a gigantic bail-out.

  • 2. Massimiliano Neri  |  17 March 2008 at 8:55 am

    It sounds to me like the nationalization of illiquid debt , isn’t it?

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