Recovery Of The Financial Crisis Could Take A Few Years

I have yet to hear a logical explanation as to when the financial system crisis will be over, and why. But the more I read leads me to believe it could take a couple years.

The IMF, which is doing research in this area, has published an extensive paper called the Global Financial Stability Report. Here is the link to Chapter 1. The IMF website contains the links to all chapters.

IMF summarizes their report’s opening chapter as follows:

Systemic risks remain high and the adverse feedback loop between the financial system and the real economy has yet to be arrested, despite the wide range of policy actions and some limited improvement in market functioning. Further effective government action-particularly geared toward cleansing balance sheets and strengthening institutions-will be required to stabilize the global financial system and to provide the foundation for a sustainable economic recovery. The banking system needs additional equity to absorb further writedowns as credit deteriorates, and risks are broadening to encompass nonbank institutions. The crisis has spread to emerging markets, with the collapse of international financing, posing challenges to corporates, households, and banks as well as raising sovereign risk. The global policy response, including the IMF’s enhanced lending framework, should help to mitigate crisis risks from deepening. There remains considerable scope for further public commitments in larger economies, but extensive provision of financing and the transfer of balance sheet risk from the private to the public sector have increased tail risks for certain mature market sovereigns.

From the IMF data, the Wall Street Journal reports that Banks need $875 billion in new equity and that US, European and Japanese financial sectors will suffer losses of about $4.1 trillion between 2007 and 2010. Of that, bank losses will total $2.5 trillion of which only $1 trillion has been written down so far. The IMF estimates that insurers will lose $300 billion and other financial institutions $1.3 trillion over this period, but they didn’t estimate how much has been written down so far.

One of the interesting conditions of the financial system today is that countries and banks are “too inter-connected to fail” - that is, the global financial system is now at risk should Humongous Bank & Broker fail. It is for this reason that the tug-of-war of political power over HB&B has begun, and that’s not going to be resolved in short order.

At the end of the day, I suspect the Federal Reserve Bank of the US will have lost its control and that the world will have a reserve currency that is no longer the US Dollar.

Would this not be an appropriate time to rein in the Fed and put it directly under control of the US government? Presently in Washington, the Fed legislation is under review. Decisions must be made here - the right ones - that will serve the people’s interests and not those of the bankers.

HB&B bankers are not “American” as the Wells Fargo (NYSE:WFC) CEO blurted out in Congressional testimony. That was utter hog-wash. It’s time to face up to the reality that bankers serve their own interests wherever in the world that may be, and in the case of HB&B that means all over it.

Subscribe by RSS Subscribe by Email