Thoughts on the Long Term Solution

RBS have a short memo out arguing for three ways of trying to help out with the on-going dramatic reduction in the credit-mulitlier:

1) Change accounting/Capital Rules

2) Inject capital in major banks in exchange for equity holdings

3) Resolution Trust Fund (Arbgued by Volcker/Brady/Ludwig)

RBS 1) is probably the most easy to implement, but smells very much like Japan in the 1990's, but would not be surpriced to see it happen in some form.

They argue stongly for 2). At the same time McPimco is out with the Pimco mantra of the Treasury to buy some MBS (To bail themselves out ?) so spreads can come down and they can get out.

The fundamental issues is that capital is needed in the system, not nessecary that prices are too low. RBS 2) is equal to 3) but in a more private sector weigthed solution as when the private banks gets enough capital that they can afford to work out a solution and wait for the underlying economy to work through the oversupply of homes and the general deleverage.

The problem with RBS 2) is that it requies global coordination that have almost newer been seen before and comes very close to semi nationalisation of the major banks in the world. The other problem is the semi-nationalisation, but probably better than 3).

The Pimco solution is more of the same of the last 20 years by creating to low credit speads instead of working out the real problem over the needed time.

RBS also argue that central would prefer no to cut rates in the short run and they are probably correct, but it does not make too much sense. We are not talking about getting rates to 2 percentage again, but at least react in Europe to the dramatically changed situaiton over the last two months.

But no matter what there is no easy fix ... and it will take time and require a combination of initiatives.