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When viewing the "mother of all financial crises," one whose solution threatens vast profitability by entrenched elites, it is sometimes necessary to go beyond the normal press stories (whose writers are often beholden to compromised sources) and seek out truth elsewhere.
In the May-June issue of Foreign Affairs, Richard Katz has an excellent discussion of the current crisis, which he formulates as a credit crunch, first and foremost. That will come as little surprise to those who understood the implications of the frozen securitization market.
It is Katz' concluding paragraph that I find so refreshing and promising:
For most U.S. firms and U.S. households, unpayable debt is not the cause of the U.S. crisis but its result. The credit crunch is depriving healthy firms and households of needed funding, leading to plunging car sales and millions of layoffs. In other words, the falling economy is transforming healthy firms into vulnerable enterprises that can survive only by slashing core costs in order to reduce debt, and it is making once-solvent households bankrupt. There is no reason to wait ten years to unfreeze the credit system or to underpin the economy through a massive stimulus. [Emphasis added]
The statement begs the questions of why the credit system is frozen and what to do about it.
Simply stated, the system cannot easily replace the $15 trillion securitization market and its outsize contribution to U.S. credit needs, even with massive government involvement on an unprecedented scale.
Gillian Tett of the Financial Times recognized this problem just prior to leaving on sabbatical last summer to write Fool's Gold, when she reported a banker saying quite forcefully that there was insufficient balance sheet to float the global economy.
The number of regulators and economists who understand the absolute necessity for restarting securitization is growing. The President's Working Group on Financial Markets issued their report in March 2008. Project Restart came from the ASF later that summer. But perhaps the most important signal came from Charlie McCreevy of the EU in his October 1st speech in Brussels last year when he laid out proposals for restarting securitization. That speech became the basis for the recent passage of the amendments to the Capital Requirements Directive.
Returning to the Katz statement, the reason for the credit crunch is that the freezing of the securitization market has removed a crucial mechanism for creating credit at a time when financial institutions have deteriorating assets on their balance sheets and assets that simply cannot be valued, priced and sold due to a lack of suitable data.
The solution is to restart the securitization process, but to do so with substantial safeguards in place. That is the purpose of the amendments to the CRD.
In the past, I've asked how Washington will respond to this challenge of leadership coming from the EU. How does Washington navigate the changes necessary to fix the system and lay the foundation for economic recovery when a financial elite is bent on preserving the vast profits that come from opacity? One has only to read Prof. Simon Johnson and Professors Stiglitz and Rogoff to understand the fundamental principles underlying this battle. Throw in a little Satyajit Das, as the ultimate insider explaining the role opacity plays in Wall Street profitability and you have the basics nailed down.
In a previous entry, I explained in more detail how I envision the regulatory authority that the Obama administration is seeking in its submission to Congress.
Most important is the role the Financial Services Oversight Council (FSOC) will play in establishing the Transparency Database. Despite the public battle surrounding the formation of a new regulatory agency charged with protecting consumers from financial products, a worthwhile and long overdue need being addressed, the battle behind the scenes most likely centers on the FSOC and the database.
It's not sexy. It's not particularly interesting. It doesn't make great reading. In the end, it's probably too much "inside baseball."
But it's the long-term solution to the credit crunch. Without it, we will likely be reading more from Mr. Katz in the years to come about a squandered opportunity.
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After all, why should they care if they loose money. Fannie Mae and Freddie Mac have already become an entitlement program which will eventually dwarf Medicare and Medicaide. To call them a private company is an assault on rational people's senses and is only being done to keep their massive program off of the government's books lest the Chinese and the rest of Treasury Bond holders get a whiff of the foul carcass rotting there.
More securitization is the last thing America needs.
More creit is the last thing we need. it is what got us into this mess. We created a false economy based on over spending and are now paying the price by cutting back to what is probably more in line with real needs.
Massive stimulus does nothing but try and "soften" the blow, but the amounts of money being spent by the government will create a debt load that will handcuff this country for far too many years.
Much like GM, why throw in 50 Billion and then go broke? Why spend so much stimulus money if the result will be a protracted downturn anyways? I think the government needed to spend money, I just didn't think it needed to commit to so much spending.
Instead we are doing the opposite in current government policy. The tax cut part of it would be a huge help in the credit markets and might just help the consumer a bit get out from underneath some of their debt.
>...Don't we need to hunt that down and cage it with some form of constraint...
Yes -- and the cage is the transparency data base Mr. Greenberg suggests. Just as the U.S. GAAP taxonomy empowered investors to identify public company security risk factors in the 1900s, an XBRL taxonomy could empower investors to identify asset security risk factors in the 2000s. The more transparency that came to public company markets, the more difficult it was for Wall Street insiders to extract economic rents, driving the search for less transparent securities, such as ABS. Mr. Butter's article at seekingalpha.com/artic... and his prior posts are worthwhile reading with this one. Since the XBRL taxonomy exists now, the only reason to wait 10 years seems to be a lack of enlightened leadership.
Having worked with debtors unable to service their debt I understand the process that occurs when one passes the tipping point. A decade plus of cheap, easy, unlimited credit built debt to unsustainable levels. The idea that all we have to do is increase the carrying capacity of the securitization industry is laughable when one realizes that currently personal incomes and corporate earnings are insufficient to service existing debt.
No solution is possible until and unless we understand the concept of unsustainability. Clearly, our "leaders" don't.
This mess can ONLY be resolved by reducing debt to sustainable levels. All the other tinkering, bailing, TARPing, and easing is just like rearranging the chairs on the deck of the Titanic.
On Jun 22 08:44 AM ChrisJCook wrote:
> There is no solution IMHO to the Credit Crunch in a deficit-based
> paradigm. The only solution lies in a new approach to Equity, though
> thye creation of new asset classes which "unitise" land and property
> rentals, and while retaining a return (and being redeemable against
> actual property occupation), dispense with the debt obligation.