The capital base of banks appeared adequate on the knowledge we had two or three years ago. What was not factored in was the systemic risk that is inherent within a globalized, yet highly integrated, financial system. Many of the devices that spread the risks for individual financial institutions, (such as mortgage securitisation) compound these risks if the whole sectors fail. This is what happened in the sub-prime market in the United States.

Unless we are to have much higher capital requirement for banks, we must understand why this system failure occured. Part of it was due to the over-reaction of central banks to the pricking of the dot.com bubble in 2000 and to 9/11. It resulted in a house-price bubble, that was only sustainable with near-zero interest rates. I would suggest that the risk not factored into the capital of banks is the concerted action to avoid recession. The lesson to be learnt is a lot more caution and humility from the central banks in manipulating interest rates to smooth the economic cycle.

I may be wide of the mark in my analysis (and have certainly not covered all the causes), but until we understand what caused the system failure we may have the wrong solutions, or may be over-reacting. In either case, the future economic outlook for the world economy over the coming decades will be bleak.

Reply: Central banks got interest rates wrong both ways, and regulators lurched from wanting too little capital to wanting too much. We need counter cyclical regulation, not pro cyclical.

His borrowing is just getting started.

Lithuania went from 6% to 4% earlier this month. Latvia went from 8% to 7% back in September.

As an aside, the Latvian central bank has been intervening in the market to support the lat, which has for some time now been bang up against the weak end of its 1% float on its peg to the euro. They've now spent 600 million euros on this. Also, Parex, their section biggest bank, was nationalized, with a 51% share being taken by the State, with the State putting 200 million euros into that bank and becoming liable for 700 million euros of debt due next year if they can't get those rolled over in the wholesale money markets when they come due.

Their entire GDP is only about 29,000 million euros…

The current account deficit is still 12.7%.

Sweden has huge exposure to the lat – if the lat devalues, the Swedes – another country in the same bracket as Iceland, with a finance sector a few times the size of their economy – will experience what I can only describe as significant financial pressures.

In fact, the Swedish Government is now acting in a way rather similar to the UK Government; they are trying to coerce banks into lending. Swedish banks have really backed off lending – I think because they know there's trouble ahead and they want to survive. The Government is trying to push, pull and force them into lending on easy terms – which is to say, to make them plunge ever faster into a potential crisis, rather than letting the banks do what they know is the right thing. It is far better the banks lend now only to those who really need it (who will pay the high rates) and the banks *survive*, rather than the banks lending to all and sundry and then possibly *failing*.

The government's unofficial official news distributor Pestowire at the Beeb agrees with you.

Correction: He offers an analysis for the credit freeze similar to yours.

I think it might be worth replying to Anatole Kaletsky's arguments here.
http://www.timesonline.co.uk/tol/comment/columnis…

I think he is deliberately confusing issues and so many people will read and believe simply because he is a financial journalist working for a respected newspaper.

Reply: I tried to, but their site stopped me writing all I wanted to!

Personally, I think we are on the verge of an economic slump and governments should be taking different measures to counteract the personal effects which will be unavoidable to many millions unless they take direct and robust intervention to halt it.

I note there wasn’t any real agreement at the summit, except to keep bailing out our banks and trying to open the doors to businesses and consumers to keep borrowing and of course spending in order to at least bring some relief to our economies in terms of maintaining product and jobs.

It appears to me that the results of this summit is not really going to make people ‘confident’ enough to continue the borrow and spend cycle, and nor is it going to remedy the plain fact that without taxpayers money, banks are completely bust.

I mean how can a bank lose all that money and still know more losses are to come, LOAN money to individuals and to businesses when their first duty must surely be to regain their own balance sheets back to respectable levels by covering the losses and building some profit ?

I think with this in mind, which I view as plain common business sense, that world economies need a different kind of stimulus in order to avoid the dreaded ‘slump’ as opposed to short or long term recession, for by the time banks have stabilised their profits and balance sheets, many businesses will already have folded, many millions will have lost their jobs and many tens of thousands ( if not millions ), will have had their homes repossessed.

They talk about ‘transparency’, yet I don’t think ‘seeing we carry on making the same mistakes’ is any good at all.

They talk about ‘regulation’, yet what is there to regulate when we’re in a slump and no one has the resources to do business?

Personally, I think the stimulus is the problem, and the free market system is the culprit which caused that problem.

Let’s face it, despite all the billions of Sterling, Dollar and Euro thrown at the problem, it is not working. Yet we have leaders like Brown and Bush telling us there will be no departure from the free economy despite that very same free economy has handed over untold millions of taxpayers money to “intervene”.
Are they honest then?

I envisage a need for a different stimulus which actually changes and puts our world to rights again and is transparently honest in delivering a controlled situation in what is after all an economic catastrophe.

Firstly, I would provide loans direct to businesses rather than through banks as a temporary measure whilst banks ‘seek out and destroy those toxic assets’.

Secondly, Governments through global agreement should back those assets with government bonds and uphold the system by recapitalizing the IMF.

Again, direct government intervention is necessary and there is a great urgency for this but there is also an urgency to stop the horse trading in stocks and shares and foreign exchange by imposing limits to share trading and limits to the amounts exchanged as a temporary method to bring ‘forced stability’ to the markets whilst hunting down the toxic assets and re-aligning our money systems back into some assemblance of order where asset values and currencies are not plummeting into slump, bank profits are preserved and jobs are saved along with consumer confidence which is the only way to promote the demand back into our economies through conscious awareness of the needs of people and what to them a ‘slump’ will otherwise entail.

Meanwhile, we’ll have ever worsening headlines such as these :-

REUTERS
NEW YORK, Nov 18 (Reuters) – U.S. stock index futures slid on Tuesday, signaling that Wall Street will extend a global equity rout fueled by fears that the extent of the global economic slump is worsening.

TELEGRAPH
Worst slump since Great Depression
Major industrialised economies will suffer the worst slump since the 1930s, according to new research from Deutsche Bank.
The warning underlines the fact that policymakers have failed to prevent the financial crisis from turning into a full-blown economic slump. It comes as world leaders agreed to hold a summit in New York billed as the “Bretton Woods meeting for the 21st century”.

BBC
“European and Asian markets have fallen sharply on fears that the world economy will enter a protracted slump.

The slide comes after the Dow Jones share index in New York fell to its lowest level in five years.

London’s FTSE 100 index fell 1.6%, with mining shares hardest hit. French and German markets also lost ground.

In Asia, Japan’s Nikkei index ended 6.8% lower and Hong Kong’s main index fell more than 4%.

The FTSE 100 was down 63.13 points at 3,942.5 points after falling almost 5% on Wednesday. Germany’s Dax index lost 3.4%, while France’s Cac 40 shed 2.8%.