If the French are embracing your economic proposals – something must be wrong according to one overseas investor.
That was what Hugh Hendry, the Scottish CIO of [1]Eclectica Asset, told “Squawk Box Europe” viewers on CNBC Europe Oct. 2. Hendry was referring to a $400+ billion bailout [2]proposed by French President Nicolas Sarkozy on Oct. 1 and comparing it the bailout bill passed in the U.S. Senate that included [3]a $700 billion bailout package and an additional $150 billion in tax extenders.
“This proposed deal is so bad that even the French want to copy it,” Hendry said. “It has been given legitimacy by the French, which tells you everything, OK? It is wrong. And I can tell you why it’s wrong – it doesn’t do anything.”
Hendry blasted the Senate for its proactive response to the bailout package – which he said was contrary to the wishes of the American taxpayer.
“This is the non-representative vote,” Hendry said. “This is the vote from guys not facing reelection. This is the vote where their participants have put their fingers in their ears, they’ve covered their eyes. They’ve closed their brains off.”
He likened the government’s efforts to absorb the bad mortgage debt on the books of the banking institutions to being the “sucker of last resort.”
“This is a vote which is arrogantly – 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.”
According to Hendry, the legislative response was misguided because it confused the overleveraging problems with issues of liquidity.
“The problem with the banking sector is not one of liquidity,” Hendry said. “They’re drowning, drowning in liquidity. Liquidity’s up to here. They can’t breathe for liquidity. They’re a bust. They’re a bust because they’re leveraged – not just two-to-one leverage, not just three-to-one leverage, 30-to-1 leverage.”
His solution is for the federal government to take over lending institutions and work out the overextended leveraging. He said the private sector couldn’t be counted on to act in that regard because they’re just not willing in this economic environment.
“[B]anks need money and we’ve become Scottish – we’ve got very deep pockets, but very short arms,” Hendry said. “And, we’re not willing to give – the private sector’s not willing to bet on another bad horse. So, it calls for the government to respond as the lender of last resort.”
Hendry said [4]the government takeover of overleveraged institutions would avert a Depression. “The leverage would immediately collapse,” Hendry said. “You’d have recession, but you’d have a chance of averting depression.”
He defended American capitalism and stated his case the type of government intervention that passed in the Senate and is now [5]pending a re-vote in the U.S. House of Representatives is not what made the nation prosperous.
“The taxpayer sees the stock market rise 10 percent the day afterwards and it says, ‘This doesn’t feel right,” Hendry said. “If I’m a businessman in
Hendry asserted a fundamental explanation of capitalism and that’s what makes it work.
“You know, the spirit, the joy, the success of capitalism is there’s a sharp knife behind your spine and God forbid if you, if you just relax one second – you’re finished, right.” Hendry said. “I don’t want people relaxing, right? And we’re getting people bailed out. That’s wrong, it’s just wrong.”
Hendry said this leveraging has taken away the ability of the central banks to determine economic activity – noting the huge gap between the Fed Funds rate and [6]the 3-month LIBOR (London Interbank Offered Rate) – 2 percent versus 4 percent.
“This is unprecedented,” Hendry said. “We are a minute from midnight in terms of outright catastrophe. I don’t mince my words, I don’t like saying words like ‘catastrophe’ then I get, I get tainted as just being gloomy and a pessimist. You have to wake up to the outstanding issues. We’re a heartbeat away from a Depression.”
Hendry said to “bring it on” the current deal because it was better than nothing, but “not much better than nothing.” He said the Fed had to act to keep banks from hoarding cash and engaging back into unsecured lending.
“If we see that, again – we will still have a deep recession, but possibly not a Depression.”
Although Hendry denied using Depression references to simulate alarmism, other media have engaged in their own exaggerations, as a recent Business & Media Institute report, “ [7]The Great Media Depression,” revealed. The media compared current economic conditions to the Great Depression more than 70 times in the first six months of 2008.