Dear SAP Banking community members,
Since the starting of the Financial Crisis, the term Bazooka has become very popular.
On 2008 US-Treasury secretary Hank Paulson requested a Bazooka for
stabilizing the Financial Markets, preventing that the action of the
short-sellers made fall the market value of a company.
Simplifying, short-sellers make fall the market value of a company by
“selling” shares of the company that they don’t actually own, but they
have “rented”. Later, they will buy the security at a lower price, and
return it to his owner. The difference on the higher selling price than
the lower buying price will make the speculator margin.
On the other hand, if the government (or any other agent) is ready to
buy any security that speculators put in the market, the price of the
security will not fail. If the price of the security does not fail,
taking a short-position is not a good business, as the speculator will
have to buy the rented security that they sold at the beginning, at a
higher price (they have to return the rented security to its owner).
That’s the whole idea of carrying a bazooka, if the speculators feel
that they can lose their money by taking short-positions in a security
(as the government has the cash for buying the security and preventing
from making fall its price), they will refrain from doing it, and the
security price will not fall.
Apparently, if you have a gun you will have to use it, if you have a bazooka you will not.
http://money.cnn.com/2008/09/06/news/economy/fannie_freddie_paulson.fortune/
The same approach has been followed in the last years by governments in North-America and Europe.
http://www.washingtonpost.com/business/economy/ecb-loads-the-big-bazooka/2012/09/06/a4ff5a2a-f814-11e1-8b93-c4f4ab1c8d13_story.html
Unfortunately, there’s something wrong in the whole construction. In a
world of limited capital, no agent (not even governments) can carry a
bazooka (liquidity) big enough for preventing financial markets from
panicking. That’s why Mr. Paulson, Germany and the IMF had finally to
use the bazooka.
But carrying a bazooka is very expensive, and using it is an enormous
waste of Capital. Can we afford wasting capital in a world of limited
and expensive Capital?
We certainly can’t, but we’re in a systemic crisis, and stopping wasting
capital is part of the exit strategy. Unfortunately systemic crisis are
long and this is not going to happen tomorrow.
Looking forward to read your opinions.
K. Regards,
Ferran.
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