From Bill Gross of PIMCO, they manage $726 billion in assets
The loose regulation and financial innovation of the past 35 years have spawned what PIMCOâ€™s Paul McCulley has labeled a â€œshadow banking systemâ€ where credit is composed on a keyboard as opposed to a printing press. Economic historians marvel at the ability of the Weimar Republic in the late 1920s to have printed paper money so fast that workers would lower their afternoon wages in a basket to waiting wives in order to front run rampaging six-digit inflation. Surely they could not have imagined shadow investment bankers and their minions spawning financial derivatives in the hundreds of trillions, far beyond the reach of central bankers and Treasury officials alike.
Gross concludes by saying the Fed will need to drop real interest rates to 1% to stave off recession, and is clearly worried about the economy. Yet the Japanese recession, which started for much the same reasons, was not solved by dropping interest rates to 0.25%.
Unfortunately, there aren’t any control systems big enough or fast enough to compensate for behavior that exceeds acceptable boundaries — as we are seeing today. In physical systems this usually results in loads that exceed the tolerance of the system, things break apart, and the system crashes. It’s going to be interesting to see what happens in the financial system.
In you look at this in Marxist terms, then the ruling class should be manipulating and controlling the situation. But they’re not. The really scary truth, I think, is they are just as stunned by this as anyone else – and uncertain about what to do. This crisis of capitalism could mangle the lives of countless people everywhere, most of whom haveÂ probably never even heard of CDOs or SIVs.