There’s an important article in the Wall Street Journal today. It says:
The Obama administration has finally come up with a plan to deal with the real cause of the credit crunch: the infamous "toxic assets" on bank balance sheets that have scared off investors and borrowers, clogging credit markets around the world. But if Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global economic crisis, his rescue plan must recognize that the real problem is not the bad loans, but the debasement of the paper they are printed on.
What do they mean? This:
Today's global crisis -- a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months -- cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they -- and all other assets -- are printed. If we don't restore trust in paper, the next default -- on credit cards or student loans -- will trigger another collapse in paper and bring the world economy to its knees.
What caused that loss of trust?
[D]erivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them.
The result? trust goes out of the window.
As they argue:
Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity. Above all, governments should stop clinging to the hope that the existing market will eventually sort things out. "Let the market do its work" has come to mean, "let the shadow economy do its work." But modern markets only work if the paper is reliable.
As they conclude (after saying much else that is well wroth the read):
Financial institutions will have to serve society and fully report what they own and what they owe -- just like the rest of us -- so that we get the facts necessary to find our way out of the current maze. They must begin learning to put on paper statements about facts, instead of statements about statements.
What do I think this means? This:
- No off balance sheet
- Regulation of all hedge funds
- The end of the Over the Counter market – which is too opaque to be reliable
- The introduction of country by country reporting
- The regulation of banks by their parent company administration world wide – in addition to, if necessary, any local regulation. Regulation that fails to cross administrative boundaries can’t work – just as audits that fail to cross boundaries could not work (I rest my case at this point on this issue – it is so glaringly obvious)
- A requirement that the accounts of every regulated financial services institution be on public record – full accounts too. Only then can the risk be appraised by third parties dealing with the organisation.
It still won’t be a panacea.
But that programme offers hope. What else does?