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Time For a European TARP


Parsad
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It's almost uncanny watching what Europe is going through.  You have 17 countries that are trying to come to some consensus, yet they probably won't until things get worse. 

 

They could easily fix much of the financial institution pains by simply implementing a TARP program and recapitalizing the banks with the same type of warrants the government bought here.  Otherwise I suspect you are going to see more articles such as this:

 

http://www.cnbc.com/id/44335728

 

Undoubtedly, credit is going to tighten in Europe as foreign institutions withdraw their capital.  Cheers!

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What we saw in August was the first wave. Large depositors in European banks started to pull out some dough, the European banks when they lose deposits have to either sell assets read (Euro sovereign debt) or raise capital. Everyone hitting the bid on the Spanish and Italian bonds forced the mkt to dry up pretty darn fast and both Spain and Italy cancelled auctions. The ECB had to step in and start buying bonds to stop the run. The money was transfered to Swiss and American banks and what did the American banks do with the dough they bought American govt. debt ,yields dropped prices rose the poor Suisse could not handle the avalanche of money and the Suisse Franc started to look like gold. It is certainly interesting and I do not think we are done. I got short again at the close today

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I'll just leave this here:

 

http://online.wsj.com/article/SB122161086005145779.html

 

- First, by buying paper that otherwise is effectively not trading, it would help restore liquidity to the marketplace and help markets to function more fluidly again.

 

- Second, by warehousing the troubled paper for a longer period than, for instance, the Fed's discount window typically should or could, it would allow for a more orderly liquidation of this paper, and the chance for much of it to recover a portion of its value.

 

- Third, by giving the agency the ability to manage mortgages with flexibility to keep people in their homes and businesses running, it should lessen the number of foreclosures. This, in turn, would help moderate the decline in real estate values and the deterioration of neighborhoods, thus supporting house prices that in fact lie at the heart of the crisis.

 

- Fourth, where necessary, like the RTC of the 1980s, this new mechanism can assist the Federal Deposit Insurance Corporation in resolving sick institutions that are so clogged with the troubled paper they cannot continue as independent entities. However, we would hope that purchasing the mortgage-related paper will minimize the need to provide emergency, short-term assistance to solvent banking institutions.

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What do you guys think of the value of the Euro in the near future (1 year or so) vs other currencies?

 

1. Slightly overvalued as it currently stands. I think euro is being held up by Chinese for a variety of reasons and it would be much weaker otherwise. Otherwise I do not understand its current strength.

 

2. Undervalued if any of the weak countries (PIIGS) exit. Euro would soar once the weak links are out. Theory being a chain is as strong as its weakest link and when the weak links are taken out it leaves a much stronger chain.

 

Vinod

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1. Slightly overvalued as it currently stands. I think euro is being held up by Chinese for a variety of reasons and it would be much weaker otherwise. Otherwise I do not understand its current strength.

 

2. Undervalued if any of the weak countries (PIIGS) exit. Euro would soar once the weak links are out. Theory being a chain is as strong as its weakest link and when the weak links are taken out it leaves a much stronger chain.

 

Vinod, how exactly can you evaluate if a currency is overvalued or not?

 

BeerBaron

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1. Slightly overvalued as it currently stands. I think euro is being held up by Chinese for a variety of reasons and it would be much weaker otherwise. Otherwise I do not understand its current strength.

 

2. Undervalued if any of the weak countries (PIIGS) exit. Euro would soar once the weak links are out. Theory being a chain is as strong as its weakest link and when the weak links are taken out it leaves a much stronger chain.

 

Vinod, how exactly can you evaluate if a currency is overvalued or not?

 

BeerBaron

 

My response is partly tongue in cheek. I do not have a strong opinion as I do not think it would be possible to really say if a currency if overvalued or undervalued.

 

I do not really care all that much about exchange rates, important as they might be. Any view I have is mostly based on

 

1. Eyeballing say trade weighted exchange rates might give us some rough idea if a particular currency is overvalued or undervalued and could be of some use at extremes.

 

2. Inflation rate differentials, Bond Yield differentials, Expected economic growth rate differentials and Expected capital flows would give a rough idea of changes in exchange rates. This again is most useful during extremes i.e. when either all these are pointing to moving exchange rate in the same direction or the magnitude of the differentials is very large.

 

Vinod

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