Still not the truth

J. S. Kim (htp: Jesse) considers the $700 trillion derivatives market (worth maybe 23 times all the stockmarkets in the world), and notes that it's being used to disguise the true woeful state of the banking system. It is as though, when listing his personal assets, a compulsive big-time gambler could include all his current Lottery tickets and horse-racing betting slips:

"... when FASB suspended mark-to-market accounting rules recently, major international banks were allowed to re-value some of their derivative products closer to their notional value on their books to pad their balance sheets. Due to this change in accounting law, I can almost guarantee you that before market open Friday, Citigroup will announce better than expected financial results as they carried huge amounts of illiquid mortgages and financial derivatives on their balance sheets."

I fear that many major banks may be thoroughly ruined, and until the lying stops, effective action cannot be taken.

Maybe it's not really so bad?

The Coyote points out that redundancies are happening faster than drop in output, so he thinks at least part of the crisis is anticipatory behaviour.

Another possibility that occurs to me, is that the credit crunch is a pretext for businesses to become more efficient and cut out deadwood in a way they'd long been planning to do anyway.

Monetary policy: chameleon on a tartan

Our government has contradictory objectives, and something will have to give.

1. It has ordered banks to rebuild their cash reserves, because they loaned out far too high a multiple of what they kept in their vaults. Normally, the way to do this would be to widen the margin between the interest they pay and the interest they charge, making bigger profits that could be salted away; or to become far more cautious in their future lending, increasing the ratio of good loans to bad ones. In a recessionary economy, where many businesses are more likely to fail, this would also imply calling in business loans and trimming their overdraft limits

2. It has called for banks to pass on the full benefit of recent cuts in interest rates, and to maintain lending, especially to businesses.

If (1) is not done, the crisis continues. And if (2) is done, it counteracts (1).

Besides, unless the government nationalises the banks, it's not in a position to force them to do (2). It must know this. Maybe (2) is merely for us punters and voters to hear, not for real action.

As Aeschylus said 2,500 years ago: "In war, truth is the first casualty. "