Few years ago I had dinner with deputy governor of the central bank of Belarus (for those who do not now where it is, it is an Eastern neighbor of Poland, and it belongs to a club of communist countries with North Korea and Cuba). He had a permission to leave Belarus for three days and delayed return could put him to jail or at least cost him a job. Anyway, he told me the the central bank operated several sovhozes (collective farms) as the Belarus lunatic leader Lukaszenka wanted state owned enterprises to take care of those farms, so central bank has several of those.

I am reading in today’s Financial Times that Western world biggest central banks are contemplating adopting Belarus standard. They want to move into real estate. To be precise they may start mass purchases of mortgage-backed securities. Hey, this is different than owning a sovhoz, you may say. In the collateralized world there is hardly any difference, you simply hold a more diversified portfolio and you care less abut risk, sometimes you are even risk careless. So in practice buying MBS paper is no different that owning few collective farms by the central bank of Belarus.

I stick to my view presented in the previous post. Central banks should focus on safeguarding stable prices, which is at risk now, globally, and governments should manage the crisis. What we need is not increasing global money supply by half a trillion dollars, we need a well-targeted action to address the problem of confidence crisis. If bank A starts lending money to bank B only if bank A has enough liquid assets (read my lips – government paper) then swap MBS for govies. Becasue – as FT argues – prices of some MBS imply unrealistic default rates (way too high) , then governments could make a lot of money. This would be relative change (asset swap), while purchases by central bank could lead to further increase of global money supply. Central banks should be reminded about existing research which shows that on the global level acceleration of money supply will lead to higher inflation, from already elevated levels.

My advice, governments should do massive assets swaps with troubled investment banks, insurance companies and mortgage houses. Central banks should manage inflation risks.