Bailout 'So Bad' Even French Want to Copy It, Says European Investor
If the French are embracing your economic proposals ‚Äď something must be wrong according to one overseas investor.
That was what Hugh Hendry, the Scottish CIO of Eclectica Asset, told ‚ÄúSquawk Box Europe‚ÄĚ viewers on CNBC Europe Oct. 2. Hendry was referring to a $400+ billion bailout proposed by French President Nicolas Sarkozy on Oct. 1 and comparing it the bailout bill passed in the U.S. Senate that included a $700 billion bailout package and an additional $150 billion in tax extenders.
‚ÄúThis proposed deal is so bad that even the French want to copy it,‚ÄĚ Hendry said. ‚ÄúIt has been given legitimacy by the French, which tells you everything, OK? It is wrong. And I can tell you why it‚Äôs wrong ‚Äď it doesn‚Äôt do anything.‚ÄĚ
Hendry blasted the Senate for its proactive response to the bailout package ‚Äď which he said was contrary to the wishes of the American taxpayer.
‚ÄúThis is the non-representative vote,‚ÄĚ Hendry said. ‚ÄúThis is the vote from guys not facing reelection. This is the vote where their participants have put their fingers in their ears, they‚Äôve covered their eyes. They‚Äôve closed their brains off.‚ÄĚ
He likened the government‚Äôs efforts to absorb the bad mortgage debt on the books of the banking institutions to being the ‚Äúsucker of last resort.‚ÄĚ
‚ÄúThis is a vote which is arrogantly ‚Äď has conceit because it is not cognizant of the mood in the country. And, the mood in the country is such that they say quite rightly that the government should be the lender of last resort and not the sucker of last resort.‚ÄĚ
According to Hendry, the legislative response was misguided because it confused the overleveraging problems with issues of liquidity.
‚ÄúThe problem with the banking sector is not one of liquidity,‚ÄĚ Hendry said. ‚ÄúThey‚Äôre drowning, drowning in liquidity. Liquidity‚Äôs up to here. They can‚Äôt breathe for liquidity. They‚Äôre a bust. They‚Äôre a bust because they‚Äôre leveraged ‚Äď not just two-to-one leverage, not just three-to-one leverage, 30-to-1 leverage.‚ÄĚ
His solution is for the federal government to take over lending institutions and work out the overextended leveraging. He said the private sector couldn‚Äôt be counted on to act in that regard because they‚Äôre just not willing in this economic environment.
‚Äú[B]anks need money and we‚Äôve become Scottish ‚Äď we‚Äôve got very deep pockets, but very short arms,‚ÄĚ Hendry said. ‚ÄúAnd, we‚Äôre not willing to give ‚Äď the private sector‚Äôs not willing to bet on another bad horse. So, it calls for the government to respond as the lender of last resort.‚ÄĚ
Hendry said the government takeover of overleveraged institutions would avert a Depression. ‚ÄúThe leverage would immediately collapse,‚ÄĚ Hendry said. ‚ÄúYou‚Äôd have recession, but you‚Äôd have a chance of averting depression.‚ÄĚ
He defended American capitalism and stated his case the type of government intervention that passed in the Senate and is now pending a re-vote in the U.S. House of Representatives is not what made the nation prosperous.
‚ÄúThe taxpayer sees the stock market rise 10 percent the day afterwards and it says, ‚ÄėThis doesn‚Äôt feel right,‚ÄĚ Hendry said. ‚ÄúIf I‚Äôm a businessman in
Hendry asserted a fundamental explanation of capitalism and that‚Äôs what makes it work.
‚ÄúYou know, the spirit, the joy, the success of capitalism is there‚Äôs a sharp knife behind your spine and God forbid if you, if you just relax one second ‚Äď you‚Äôre finished, right.‚ÄĚ Hendry said. ‚ÄúI don‚Äôt want people relaxing, right? And we‚Äôre getting people bailed out. That‚Äôs wrong, it‚Äôs just wrong.‚ÄĚ
Hendry said this leveraging has taken away the ability of the central banks to determine economic activity ‚Äď noting the huge gap between the Fed Funds rate and the 3-month LIBOR (London Interbank Offered Rate) ‚Äď 2 percent versus 4 percent.
‚ÄúThis is unprecedented,‚ÄĚ Hendry said. ‚ÄúWe are a minute from midnight in terms of outright catastrophe. I don‚Äôt mince my words, I don‚Äôt like saying words like ‚Äėcatastrophe‚Äô then I get, I get tainted as just being gloomy and a pessimist. You have to wake up to the outstanding issues. We‚Äôre a heartbeat away from a Depression.‚ÄĚ
Hendry said to ‚Äúbring it on‚ÄĚ the current deal because it was better than nothing, but ‚Äúnot much better than nothing.‚ÄĚ He said the Fed had to act to keep banks from hoarding cash and engaging back into unsecured lending.
‚ÄúIf we see that, again ‚Äď we will still have a deep recession, but possibly not a Depression.‚ÄĚ
Although Hendry denied using Depression references to simulate alarmism, other media have engaged in their own exaggerations, as a recent Business & Media Institute report, ‚ÄúThe Great Media Depression,‚ÄĚ revealed. The media compared current economic conditions to the Great Depression more than 70 times in the first six months of 2008.