From the London Irvine Report - December 29, 2008

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"The old Greenspan gambling system’s dead, but until we know the full scale of the losses we can’t begin to build the replacement says Liam Halligan. Does anyone really know the true derivatives position of JP Morgan Chase or Goldman Sachs? How much are the Fed, the ECB, the BOE and BOJ, really on the hook for?  How much gold is really left in the central bank vaults, rather than double counted and “leased” into the market never to be seen again?  Until the bankers and politicians get some old time religion and honesty,  the fiat problem will just keep growing until the bankruptcy of us all."

 

-----with the result that write-downs in the global financial system to date have reached $993.9 billion, against $919 billion in capital — which is to say that the entire global financial system is insolvent, except for Fed bailouts. Bloomberg (the professional service, not the publicly available news) has done the numbers, and they are impressive. Freddie Mac had $56 billion of writedowns against $15.6 billion of capital, Freddie Mac had $58.4 billion of losses against $20.8 billion of capital, Washington Mutual had $45.6 billion of writedowns vs $12.1 billion of capital, and so forth.

Only full disclosure of toxic debts will get the West moving again

It has been a year of financial explosions

By Liam Halligan Last Updated: 5:44AM GMT 29 Dec 2008

 

The commercial pillars holding up the Western world - banking prudence and sound credit - have been smashed to smithereens.

 

The "advanced" nations are now flirting with economic collapse. The emerging economies have also suffered "collateral damage" – the West's "sub-prime" debt bombs now threatening the stability of global commerce.

 

The developed world is on course to contract by 1.1pc during 2009. That will hurt. The emerging markets are also set to slow – their growth falling to 3.1pc – as China and India feel the impact of lower Western demand.

 

But 2010 could be even worse – unless policymakers can piece the global economy back together. And the prevailing policy response –soft bail-outs, ultra-low interest rates and unfettered government spending – not only won't work, but will compound this crisis.

 

So how should Western governments respond? How can we escape this credit crunch, and prevent it being repeated?

 

As the Bank of England Governor Mervyn King said last month, "getting the banks lending normally again . . . is more important than anything else". After piling into risky assets for years, the Western banks now refuse to lend to millions of credit-worthy firms and households. That's jammed the wheels of finance, making fears of recession self-fulfilling.

 

The money markets are locked because the banks don't trust each other. Even they don't know how much toxic debt is out there – and which bank could be the next to fall. That's why the spread between the London Inter-bank Offered Rate and overnight interest rate swaps of the same maturity remains so wide – and wider in the UK, now, than either the States or the eurozone.

 

The crucial inter-bank market will remain frozen until the banks are forced, under threat of prosecution, to reveal the true extent of their sub-prime liabilities. Such "full disclosure" won't be easy – involving the exploration of millions of complex derivative contracts, often across borders – but it simply must be done.

 

America's first serious reaction to "sub-prime" was the Troubled Assets Relief Programme – buying up hundreds of billions of dollars of dodgy loans the banks didn't want any more. When that didn't work, the US asked banks to forfeit some share capital in return for government cash, as in the UK.

 

But that's failing too – as shown by sky-high Libor rates. So, as a matter of urgency, the West must copy the hard-headed Swedes – who, in the early 1990s, insisted nationalised banks write down the full extent of their non-performing loans before more public money is spent on recapitalisation. Only then – once the sub-prime losses are fully-exposed – can securities markets clear and the inter-bank market reboot.

 

http://www.telegraph.co.uk/finance/comment/liamhalligan/3982447/Only-full-disclosure-of-toxic-debts-will-get-the-West-moving-again.html

 

"The tremendous merit of gold is, if we want to put it that way, a negative one: It is not a managed paper money that can ruin everyone who is legally forced to accept it or who puts his confidence in it. The technical criticism of the gold standard become utterly trivial when compared with this single merit.”

Henry Hazlitt