Word: mcculley
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This is what some economists call the paradox of thrift. The notion is generally credited to Englishman John Maynard Keynes--seemingly the source of every important economic idea these days--although he doesn't appear to have actually used the phrase. Paul McCulley, an economist and portfolio manager at bond giant Pimco, defines it like this: "If we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person's spending is another's income--the fountain from which savings flow." (See the top 10 financial collapses...
This kind of behavior, contends McCulley, is what the paradox of thrift demands. "Uncle Sam has got to go the other direction and lever up his balance sheet and actually spend money," he says. Simply standing by and letting the downward economic spiral worsen strikes him as "inconsistent with a civilized society...
None of this means Geithner will be a success as Treasury Secretary. He's still got to actually succeed at nursing the financial system back to health. "Hank [Paulson] was in emergency-room care," says Paul McCulley, a managing director and head of the short-term-bond desk at money-management giant Pimco, "whereas Tim is still in emergency-room care but also preparing a room for further care after the emergency." He at least shows signs of having a good bedside manner...
...should government (and by extension taxpayers) even be contemplating such action? The clearest explanation is probably that of Paul McCulley, a managing director of the money-management firm PIMCo, who wrote an essay last summer on "The Paradox of Deleveraging" that continues to resonate in financial and economic circles. When a debt-fueled investment bubble bursts, financial institutions that make their living off borrowed money (banks, investment banks, hedge funds) tend to want to reduce their leverage - their ratio of debt to equity. That's perfectly rational. But when everybody does it at the same time, big trouble ensues...
...Paul McCulley and Ramin Toloui are portfolio managers at Pacific Investment Management Co. (PIMCO), one of the world's largest fixed-income investment firms...