West has to deal with toxic debt to end recession
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Independent Minds
Attempts by the G20 leaders to halt the global recession are doomed unless they get to grips with the "toxic" debt hidden in the shadow economy, warned to Hernando De Soto, the prize-winning Peruvian economist.
Mr De Soto said: "This toxic debt is the elephant in the room and solving the problem is the missing link to getting the world economy moving again. Until we know what proportion of the estimated $600trn [£400trn] of derivative contracts is toxic, then credit markets will remain in a state of chronic paralysis."
He added: "No amount of fiscal stimulus or new international regulation will get the banking system fixed until we know how much poisonous paper there is on the balance sheets of the banks. The G20 leaders have given the world economy a blood transfusion but now they need to get on with the operation if they are to save the patient's life."
Mr De Soto welcomed the efforts of the US Treasury Secretary, Tim Geithner, to put pressure on institutions to establish how much toxic debt they hold. "But there must be more focus on forcing all the financial institutions and banks to face up to the bad debt hidden away in the shadow economy. Lawyers and bankers must now work on bringing these contracts out of the shadows so they can be given a value and be traded."
The economist also claimed that it was fear which forced Mr Geithner's predecessor, Hank Paulson, not to go ahead with his original $780bn rescue plan to ring-fence toxic paper: "I'm told that the bankers told him they didn't know where it was hiding." Mr Paulson's U-turn over toxic debt – switching instead to recapitalising the banks – was never fully explained. "My sources told me they were terrified that they couldn't find out where all the contracts were lodged and that's why Paulson dropped the plan," he said.
An adviser to presidents around the world, Mr De Soto runs the Institute of Liberty and Democracy in Lima, and advises emerging economies on how to alleviate poverty by giving the poor property and other legal rights. "The problems are similar," he said. "US and European authorities find it difficult to believe that the fundamental cause of a recession could be a badly documented legal system. But this is what this crisis comes down to and will only be alleviated when that paper is documented, has a value and can be traded."
Mr De Soto reckons there are only a few hundred billion dollars of toxic paper: "Until we acknowledge this toxic debt then this crisis could get even worse. Let's learn the lessons of Iraq and find out if these derivatives are the financial equivalent of weapons of mass destruction or not, and if so, get them documented."
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Comments
I thought that was paid for years ago.
But the city of Berlin has enormous debt but that is NOT due to East Germany.
Can you can picture a pile of 500 Euro notes?
Yeah - great.
Now imagine that the pile is 17 Kms in height and you have the debt of modern Berlin.
I have learnt one thing now, when you see money around you actually see debt. And when you see poverty in the West you are actually seeing someone who is living within bounds. Hmm pause for thought.
But here in Brandenburg - East Germany, it is another hot and sunny day and as its Sunday we can ignore the stupidity of the Capitalist system of Profit.
All this will take time and political will. Those responsible for the crisis still hold influence in political and financial circles. Only new leaders, untarnished by the mistakes of the past, will have the credibility and clout to do what is necessary.
Forget the G20, that is why the markets boomed on Thursday/Friday. Cheerleaders for the abandonment of 'mark-to-market' will say that it has contributed to the crunch because banks cannot sell assets like toxic mortgage-backed securities other than at a very low price (which of course they don't want to do, because then the scale of the toxic debt becomes apparent), therefore inter-bank lending has dried up due to lack of confidence and so has credit.
Ordinary folk - if they had a clue what sleight of hand is being perpetrated now - might think that the banks should not have overvalued these rubbish 'assets' in the first place. The outcome is that the banks are being let off the hook, their capital values can now be adjusted upwards, these impaired assets will still be impaired (especially as a greater proportion become sub-prime as the recession proceeds), and nemesis is being postponed to a future time when the taxpayer will have to pick up the tab again.
Although this change to accounting rules has happened in America, the International Accounting Standards Board is now under pressure so that the rules in the EU can be relaxed too http://www.bloomberg.com/apps/news?p
Those opposed to disclosure of toxic debt do so because it may open a paper and electronic trail to their misdeeds, for which they may be liable in USA and other courts. And - be sure - these people are still mega-rich. Thus yet again a few ultra-rich miscreants hold the entire world in limbo, unable to get on with the job of reconstruction. There should be some way out of this - maybe a blanket amnesty for these vermin, however distasteful. Mr Alex Weir, Gaborone and Harare
Let these banks go bankrupt, sell their "toxic" assets at market value, hey presto no more toxic debt and no zombie banks!
The notion that the taxpayer should pay for these losses just so these banks operators and investors can carry on making their billions it disgusting.
Controlled bankruptcy was only ever the fair solution given the scale of the problem. But of cause this would have made a lot of rich people a lot poorer, so no surprises that our governments followed the taxpayer bailout route.
The whole deal is absolutely vile. The poor and middle classes have just been ram raided by government and the money men. Gordon Brown saved the banks? No, he just handed over our wealth and our children's wealth to a reckless greed machine.
And you are saying "let one of them fall, no-one will notice".
Imagine the noise that 600 trillion dominoes will make.
Someone will notice.
Thing is, you are talking a structural collapse at the very heart of our financial system. the epicentre. Or, to put it another way, why did the Feds rush spade loads of money over to J P Morgan to quickly buy up Bear Stearns? The Fed paid for it. Why? Well, because JP Morgan invented derivatives and it holds vast numbers of them. And Bear Sterns was a big counterparty. And the fear was that if Bear Sterns' collapse was too public it will expose the derivative underbelly to the world and the US government and the global financial system panicked at that thought because it's so rotten.
So rather than expose the real value of the exposure to JPM, the US government and JPM rushed to simply absorb it and keep it well hidden from view.
You see, it's a deck of cards, the derivatives market and this is an electronically linked, 24 hour global village in the financial world. Kick out a bit of the system and like the WTC towers, the entire system just collapses. And it will collapse in relay around the entire planet.
If you think that the credit "crunch" is bad now because the capital markets are frozen, imagine the entire global financial system paralysed. That's what we are talking here. Right now, money moves. You write a cheque, it clears. You sell goods, they money comes into your account.
It's credit that's frozen, not the entire global system. Just a tiny part of it.
But if the derivatives kick off, then everyone is exposed to everyone else is the game, no-one can move. Money can't move (for various reasons, too long to post here) but essentially the entire world's financial institutions are all rabbits in the middle of the road in the middle of the night with a speeding car hurtling towards them with very, very bright, blinding lights.
They can't move, they don't know where to move, they are paralysed by indecision and even if they did move they couldn't get out of the way fast enough.
That's the reality here. It's the dirty secret that even the mainstream media have been very cautious about digging into but in the financial world it's been the worry from even before the "crunch" kicked in and right from the start of this crisis, derivatives have been the thing that has been most spoken about in huddled, quiet whispers in the corridors of the financial world.
The reason that no government so far has been willing to move on this is because we all know that there is a monster behind the door, we know that it's a very scary monster, we just don't know how big it is. It sounds big, it feels big and there is a huge shadow that we can see underneath the door, but no-one is brave enough to turn the handle to take a peek. We're all hiding behind the sofa hearing it roar and beating at the door so we're sticking our fingers in our ears with $1trillion in dollar bills and keeping our eyes tightly shut.
Obviously nothing is really solvent until the derivatives mess is cleaned up.
I love how the banks are saying they are in good shape and yet still need a bailout.
Who do they think they are kidding?
So the question is who is going to take the losses?
Up till now the burden has been pushed on the taxpayers so the Bankers and Hedge funds who created it don't go bankrupt.
To the people who created this mess:
Yes you, you guys who think that in some way you are "superior" over the commoners.
You are actually utter failures.
The biggest failures of our time.
If it wasn't for taxpayers bailing out your failed asses, you would be bankrupt beggars on the street.
And you somehow think your better than everyone else?
From my vantage point a cartoon character could do your job better than you guys.
I hope the wall of denial you have built around yourselves is enough to shield your minds from the laughter you have brought upon you...
The commoners think you are all common trash.
And unfortunately, it's true.
Mr. Soto. I am sorry I do not know you personally but the story about the elephant is interesting. You see. The elephant takes up the room. I have very small palace to keep my table and chair leave aside the bed and the bath. Now if I try to get rid of the elephant, the council people and Zoo people will call me cruel men from Tanzania, I need the place also.
The toxic assets are so many spread around the globe that we have no idea if this one elephant or a herd. Who will try remove the elephant is like who moved my cheese.
I thank you
Firozali A. Mulla