All those non-performing loans, and toxic debts, many of them linked to the
housing sector, havent gone away. We dont know their precise scale, of
course, because the banks still wont publish full sets of accounts,
including their off balance sheet vehicles. And, disgracefully,
governments and regulators wont force them.
So banks are petrified of lending to each other, as they know very little
about each others solvency. Investors, too, are worried about
recapitalising banks, or even holding bank shares in most cases, as they
dont know what theyre buying.
The result is that inter-bank lending the wholesale market for loans has
seized up. This, in turn, has led to a drought of finance for solvent
households and firms. So, investment suffers, housing markets suffer, and
economic life stagnates. With the credit channel blocked, the
wheels of Western finance have stopped turning and commercial stasis has
Thats why growth is so slow, with some countries now re-entering recession
because insolvent banks, pretending theyre still viable, are hoarding cash
in a desperate bid to survive.
Meanwhile, legitimate demands for credit, not least from firms wanting to
maintain or expand their operations, are denied or granted only at usurious
rates. Ergo, the West isnt recovering and unemployment is rising and the
core of the problem is a group of opaque, moribund banks.
Attempts to keep these banks afloat, extending the lives of what are
commercially dead institutions, have hammered sovereign balance
Several of the most advanced nations on Earth are now only keeping their
government debt markets afloat by ordering central banks to print
electronic credits, then buying back blocks of their own paper.
During the past two decades, Western governments have borrowed and spent
irresponsibly. Cleaning-up after the banks, though, has pushed several
financially stable nations to the brink of insolvency and, if were honest,
In western Europe, of course, this evil brew is even more ghastly given the
policy incoherence, and conflicting incentives, imposed by the economic
madness that is the euro. Breaking this deadlock and restoring growth and
stability isnt about big bazookas or quantitative easing.
These solutions merely buy time, albeit at untold cost to our
children and grandchildren.
Above all, though, QE and the other special measures have allowed
badly-run banks to keep pretending they can avoid facing-up to their massive
investment errors, while allowing politicians to dodge the really tough
Given the powerful interests it serves, no wonder QE is set to continue. Bank
transparency genuine transparency, such as the one FDR imposed to
break the Great Depression, or as Sweden used to escape its banking mess in
the 1990s has been the third rail of the Wests response
Many politicians know its ultimately needed, but theyve refrained from
discussing it for fear of enduring an almighty shock.
The power of the banking lobby, its campaign dollars, and concerns about being
seen to provoke a crash, have meant our leaders keep avoiding the central
issue that is that many of our banks are insolvent and need to write off
their losses and close. Were that to happen, powerful financiers would look
stupid. Having assumed their crazy schemes had implicit government backing,
they would end up losing cash.
Yet upheaval is needed, to purge a rotten system and let commerce start anew.
Confessions need to be forced and, if were serious, significant criminal
behaviour needs to see the light of day.
Full disclosure must happen, if were to free ourselves from this
torpor and get the Western world back on an even financial keel. Were
just so overleveraged, said Romney, during a routine campaign stop in
Florida. Theres so much debt in our society, and some of the
institutions that hold it arent willing to write it off and say they made a
mistake … and that we need to write those losses down and start over.
They keep on trying to harangue and pretend what they have on their
books is still what its worth, Romney continued. The banks are
scared to death that if they write all these loans off, theyre going to go
broke hellip; So they just pretend all of this is going to get paid someday so
they dont have to write it off and potentially go out of business hellip; This is
now cascading through our system and in some respects government are trying
to just hold things in place, hoping things get better …
My own view, Romney concluded, is that you recognise the
distress, you take the loss and let people reset. Banks that are prudent
will be able to restart, those that arent will go out of business.
I dont particularly want Mitt Romney to be President. Were he to win the
White House, he may even backtrack on these Florida words. Yet this is a man
with perhaps more financial acumen than anyone who has ever got close to
becoming President. And in arguing for full disclosure, Romney
is totally correct. He is also far from alone. A growing number of policy
experts now talk along these lines.
Americas SEC, in fact, just issued guidance that US banks should
provide detailed information about their European debt exposure
so investors can make more informed decisions about which banks should
Guidance, though, isnt a requirement, more an attempt by
compromised regulators to fend-off an idea whose time has come.
Last week saw much backslapping at Davos, as eurozone politicians, and their
banking chums, pushed Germany closer to full-scale money-printing.
Predictably, banking stocks rallied. The bankers should know, though, that
the logic of full disclosure is irresistible, the historic
evidence clear. Romneys outburst may have been unconscious, perhaps even
unintended. But he has tipped the first political domino in a process that
will ultimately prevail.