Ring a Ring a Roses-All Fell Down

The Basle committee had mandated capital adequacy ratios for banks and many banks had their own rules for recognising impaired loans. But with the introduction of sub-prime, mid-prime, altA, interest only, negative-amortised, option ARM and other such loans the Banks and their regulators moved away from proper recognition of risk and capital backing.

This is as much a failure of Central Banks as any other. Now they are making another great mistake in thinking that tweaking interest rates will be the solution to the crisis.
The Banks are basically insolvent and have no will or resource to carry on their basic business of lending and making profits. Whatever funds are pumped into them will go in a bottomless sinking hole to compensate for the losses already on the books and losses yet to be recognised. This is the sorry state of Banks in US and UK and a few other key western countries today.

In return for the ‘Made in China’ goods exported to USA, the Americans have sent ‘Made in USA’ financial crisis and recession to the whole world. And what Osama Bin Laden failed to do, the Wall Street Wizards have done to USA, i.e bring it to a stand-still.

The crisis started with home loans and the remedy has also to start there. The home buyers who took these toxic mortgages have to be given subsidies to compensate for the loss of equity which can be applied to write down the debt. The funds pumped in should get the Government ownership of the Banks for the near future. Management of the Banks has to be changed with priority to keep to basic Banking. The relief has to be spread to the whole gamut of bank customers and home owners. Those who paid their loans properly could get some tax relief.

I am also wondering whether the world is once again following a wrong trend being set by the Americans in the economic/fiscal fields.

The American brains have been the principal culprits in creating the crisis in the first place by designing exotic financial products which they sold all over the world. BY following that trend the Banks and Financial Institutions have lost all their money and credibility. Now the cure being tried by the Americans, namely, lowering interest rates, pumping money, rescuing troubled lenders (who may not deserve such rescue), throwing big money at the problem etc is again being followed by most of the world.

Is this the right way forward ? This may result in more inflation, higher interest rates and more restraints on the business in the future, deepening the depression. Why not take a pause, let some Banks/institutions fail and the whole field be cleaned out. IN the meantime whatever money is available should be used to help the citizens who are affected, may be by direct assistance to reduce their loans, cash subsidies, increased unemployment benefits, etc.

May be it is the right time to call a meeting like the Bretton Woods conference. One thing that can be immediately decided at such a meeting is to stop all warfare and arms production so trillions can be saved and diverted to nation building everywhere. But we don’t have a strong leader to lead and direct anywhere in the world.

In the absence of such an initiative each affected nation may stumble from step to step and like the nursery rhyme ’round and round and all fell down’.

Hope this does not come true.