In the award category for transparently biased commentary this week, Bill Gross of Pimco Funds wins by a nose. Karl Rove's love letter to Barack Obama in the Financial Times" ("How to Beat Hillary") was amusing for its obvious intent to get a weaker Democratic candidate nominated. But I find Gross's assertion that the Federal Reserve may have to cut the funds rate to 3% to bring liquidity back into the financial markets even more self-interested — and off the mark — than usual.
In case you missed it, a central point of Gross's reasoning for a stronger interest rate cut than the half point already priced into the futures market is this: to prevent the "shadow banking system" from imploding. This is the same shadow banking system that created CDOs and SIVs and was built on leverage and cheap financing, and that Gross claims is leading to a breakdown of our modern banking system.
How is the Federal Reserve lowering the funds rate drastically, to the 3% Gross says is needed, going to: a) influence banks to lend to each other; b) reverse the mistakes bankers, investors, and even state-run investment pools made by investing in extremely risky assets; c) prevent a repricing of risk (which would be a mistake anyway); or even d) restore the confidence of investors in markets like structured finance?
Gross doesn't have an answer to that, and I doubt anyone else does either, because aggressive cuts will not accomplish any of it. What they might do is stimulate the bond market, to a point. And isn't that where Gross's interests lie anyway? Gross is a smart guy — smart enough not to bite the hand that feeds him.
|
Video
