PIMCO on Financial Regulation
The portfolio managers at PIMCO are somewhat misunderstood the way I see it.
They are brutally pragmatic, unlike many bloggers. And while Bill Gross gets the headlines, Paul McCulley is no slouch:
As the Bear Stearns rescue forcefully demonstrated, the Fed had no choice but to open the discount window to investment banks, to facilitate the takeover of Bear in particular and even more importantly, to prevent a cascading of runs. This was a moment of truth and clarity, if there ever was one. I applaud the Fed for doing what it had but no choice to do. At the same time, the Fed’s action demands a complete re-think of the bifurcated regulatory regime for conventional banks and investment banks.
Most elementally, all institutions that have access to the Fed’s discount window must have pari passu regulatory oversight. It really is that simple. Access to the window is unambiguously a public good – and only the Fed can provide it, because only the Fed has the legal power to unlimitedly create deposits on itself out of thin air. Accordingly, access to the window must – as it does in the case of conventional banks – carry the quid pro quo of prudential regulatory oversight, complete with enforcement powers.
Investment banks won’t want that, of course. But then, all rational people want lunch for free. The Fed, owned by “we the people,” was not created to be in the free lunch business. That doesn’t mean that investment banks actually have to eat lunch. Indeed, conceptually they could legally forswear any right to eat at the Fed’s cafeteria, in which case they could remain as they are. But as a practical matter, as the Bear Stearns episode made clear, this is not a practical solution: in extremis, if you are deemed too big to fail, or at least too big to liquidate on the wire, you will have access to the discount window. Reality is reality. Pimco Commentary
Many pundits have been openly critical of PIMCO, but Gross & co. will likely have the last laugh. They invest with their heads, not their heart.
And their performance against their peers have been stellar over the past year; they have been one step ahead of the Fed all the way.
You don’t have to agree with their posture, but you have to read it.
At least if you want to win.
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