Send in the clowns…

I don’t watch much television these days, but the drama series I have been viewing recently has been enthralling. On Tuesday the great and not so good of the banking industry were taken to task by the Treasury Select Committee and what a “sorry” bunch they were. At least they managed to utter the “S” word which is more than the politicians and regulators, who are pretty much equally culpable in this “sorry” mess, would ever dream of doing. Has it ever occurred to them that not one of us is perfect and that a little bit of humility goes a long way? Prime Ministers question time has descended into farce and is quite frankly a waste of everyone’s time, especially that of the two main protagonists.

A line or two from “Send in the Clowns” would not be inappropriate. “One who keeps tearing around (Brown); One who can’t move (Cameron); Send in the Clowns…” Not much difference in the US. Tim Geithner, who was heralded as the saviour of Wall Street, (as opposed to “the World” which of course is Gordon’s territory) has announced the latest $2 trillion bank bail out “plan”, which is very light on detail. It would be fascinating to watch the “Great Experiment” unfold, as a detached observer, if it weren’t for the sheer number of zeros that accompany each change of direction. The “Great” Gideon Gono, the chairman of the Central Bank of Zimbabwe, has developed a neat trick to solve this problem. Having issued the first trillion Zimbabwe dollar note he proceeded to lop off all 12 zeros to make it a one Zim affair. Marvellous! If only it were that easy…

Mervyn King is also flirting with inflation although not yet at the 231 million per cent level that Giddy Gono has unleashed; but give him time! The UK bail outs are, by American standards, more modest affairs. The latest bond bail out is a mere £50 billion and is to be funded by issuing Treasury bills, which will not add to the monetary base. However he also said that the MPC is looking at a gilt buy back programme which would be funded by “quantitative easing”; the new buzz word for printing money; aka monetising debt, which will. Inflation is anathema to the bond markets so why would he buy gilts using freshly printed money, which has to stoke inflation at some stage; a fact that he readily admitted to. The answer is that he has no choice as the amount of gilt paper the government will be obliged to issue to fund this stimulus package, and the one before that and no doubt a few more to come, will swamp the market unless Merv is there as the backstop.

As with the American plan the details of the bond bail out have yet to be finalised but apparently it will be up and running by Friday. The intention seems to be to buy corporate bonds that have some realistic chance of avoiding default; something that a lot people looking for yield (decimated by the Bank’s “zero interest rate policy”) are already doing. I am not sure how this helps liquidity in the sub investment grade/CDS end of the market but, rather like Ben Bernanke at the Fed, Merv is confident that if he throws enough “money” at the problem it will eventually go away. Perhaps it’s time he gave Gideon a call…