"The banks are sick and dying and we are strapped onto the operating table next to them where time after time our healthy bone marrow is donated to
Posted by
Loyola
Aug 17 '09, 08:38
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them to keep the cancer which is eating them at bay for a little while longer."
""explain...why this recession won't come to an end globally by May next year."
OK. Here's the very short version.
Outstanding debt.
The financial system is sitting on a vast amount - many many hundreds of Billions of dollars worth of 'assets' whose value is unknown. These assets are debts obligations such as mortgages and securities and derivatives created from those mortgages. They were created largely between 03 and 07. They amount to an unregulated paper currency which the banks created and used between themselves and other financial institutions.
The creation of this debt backed currency is how they created such a massive bubble of debt. But as the underlying debts ( mortgages) have defaulted the paper currency based on those debts has devalued.
The problem is that the banks and other financial institutions have steadfastly refused to allow any re-valuation of this debt backed paper. The banks and others are still holding them on their balance sheets and in off-balance sheet vehicles such as SIV's AT FACE VALUE.
This is the problem. The banks have insisted that these 'assets' be counted at face or near face value. At that value it appears that the banks are well capitalised. They count these debt backed bits of paper as capital assets. IF the underlying assets were valued at anywhere near what they could be sold at in the market then most of their value would disappear like a fart in a storm.
And along with that value would go the banks solvency. It would be immediately clear that the banks do not have the capital they claim and are in fact insolvent.
That is the reason why, for example, US banks are simply not foreclosing on many houses. As soon as they foreclose they have to mark the value of the mortgage to the market price and the value of any paper based on that mortgage and others like it is revealed at market value - ie bugger all. It is better to simply ignore the delinquency and pretend the value is face value.
But this line is difficult to hold. WHenever someone goes bankrupt or someone demands their money from a fund or settlement of a CDS real values have to be declared and losses appear out of thin air. This is how a bank claims it is well capitalised one minute and the next has to raise $12B in new capital the next.
What our governments have done is give, lend, or swap national currencies to the banks to replace the holes left by the now valueless debt backed paper. In this way they stave off large bankruptcies. BUT it means the debts keep coming. The original debts keep accruing their interest payments which means the longer they are kept alive the more they cost when the eventually do ger realised.
PLUS the money we have given the banks has itself been borrowed by us. So we are paying interest on THAT loan as well. SO now we have two lots on interest to pay plus of course the original sum.
This is unsustainable. The bankers know it and so do the governments. They know this ends in disaster unless this process ignites renewed growth. But here 's the thing. That growth now has to pay off two lots of interest, the original sum and then fuel new profit. WHat level of growth could do that?
Everyday this goes on makes it less mathematically possible. But will anyone admit this?
The banks won't. As long as it goes on they reap rewards. The governments won't because we would hang them from lamp-posts.
As long as the debts are not forced out they will suck us dry. Bring them out and clear them and we could start to build anew. But it would be painful and much more so now than it would have been if we had had the courage to do it right at the start.
Is there no chance of any sort of recovery?
Well yes there is. a sad and vicious kind of recovery. A two tier one.
You see it is possible we have already or will soon have given the financial system so much money, bailed them out so successfully that we will have actually decoupled them from the rest of the economy.
We could see a 'recovery' where the financial system can use the money we have given them to trade sustainably among themselves. Enough to keep other money in play in the market in hopes of getting a slice of the 'recovery'. BUT they will not use that money to lend into the 'outside' falling economy (outside finance and the few commodities they speculate in).
Outside firms will be going bankrupt, unemployment will be growing. At first they will say these are just lagging indicators. But slowly it will be come apparent that these are not lagging they are just not connected.
In other words every rise you see in the markets will just be a measure of how much the financial class is doing well and leaving you behind to pay off their old debts as the debt slaves you will have become."
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