A month ago the International Monetary Fund was charged by the G20 finance ministers with finding out precisely how the balance sheets of the world's major banks would look if they were to get back to lending again at more or less the rate they were in the pre-crisis days. Today the Fund delivered its verdict and it is both clear and terrifying. The simple truth is laid out in page 33 of the Global Financial Stability Report, published today in Washington: "if banks were to bring forward to today loss provisions for the next two years, before expected earnings, US and European banks in aggregate would have tangible equity close to zero." In other words, the entire global banking system would be bankrupt – kaput – if its institutions immediately wrote off all the toxic assets still sitting in their vaults without any government assistance. And bear in mind this already takes into account the money we have already thrown at the banks. So even after all this has been spent the financial system remains, effectively, insolvent, bearing in mind the amount of cash the banks have lost as a result of the bubble of the 2000s. – UK Telegraph
Dominant Social Theme: Worse before better.
Free-Market Analysis: How come the IMF gets to offer this observation? The Internet has been filled with just this sort of perspective for quite a while. There are plenty of top notch non-mainstream economists and journos who have long-since figured out the current system doesn't work very well and is on its way to serial catastrophes, each one somewhat larger than the last. But somehow when the IMF says it, the mainstream media picks up on it as if it is news.
How can it be news? Certainly not NEW news. Maybe old news. The late 1970s deflation cleared out the system and made the massive inflation of the next 30 years possible. Like a diver launched from a flexible board, this year and last were propelled aloft by what happened decades ago when the fiat-money machine began to churn out just a little bit too much currency, day after day. Bankers don't know how much money to print anyway – only the free market can decide that, and there is no free-market when it comes to money in the Western world. There is only the diabetic drip, drip, drip of currency, like too much sugar in the blood leading, eventually to … a massive heart attack.
Here the metaphor ends – or perhaps more properly shifts to another one. The corpse of the economy after such a major event should be declared dead, or would be in any sane society. But Western society these days is not sane. Bankers, not doctors, cluster around the patient. Shocks are applied directly to the heart, but do not work. Eventually the corpse, now in a stage of rigor mortis, is levered erect. The face is painted, the eyes are propped open. The flesh is ripening, but all pretend that a miracle has taken place and a resurrection has occurred.
This is where we are now and plenty of people understand it – including the Daily Bell – even if it has come as a great grim surprise to the IMF. The banking system is dead, dead, dead – and to talk of a revival is wrong. What Western bankers are engaged in doing, as a matter of fact, is to figure out a way to swap a live body for a dead corpse. Meanwhile, they are simply keeping up appearances; in this way they are in much the same business as a mortuarist. Appearance has become far more important than reality. Here's some more from the same report, as summarized by NewsMax:
Using different scenarios, the IMF estimated banks could need additional capital of between $275 billion to $500 billion in the United States, about $125 billion to $250 billion in Britain, and about $375 billion to $725 billion in the euro area. The IMF noted the size of total credit losses could be lower if forceful and well-targeted actions are taken. It said banks in the United States, euro area and Britain were expected to post losses between 2008-10 before they return to modest levels of profit. Financial institutions are likely to face losses for a period that would be broadly consistent with the time it took banks to recover during the Great Depression and in Sweden in the early 1990s, the IMF said. However, it said current write-downs are likely to be more severe than during those crises.
There – the IMF has said it now. There will be no "recovery" until 2010 and write-downs this time round are likely to be more severe than during the Great Depression. OK, perhaps one is supposed to stand up and cheer because the banking system will emerge greatly cleansed – lean and mean – from such a challenging episode. No, we don't think so. The banking system, as we wrote before, is dead. It is as broke, as bankrupt as any American car company. Every major bank – or almost every major American and European commercial bank – has some sort of meltdown occurring on its books. It is the money system itself that has failed, and if a business fails, it seems to us, you ought to bust it up, not prop it up and pour money into it until it "recovers."
The recovery that the IMF is forecasting is not a recovery at all. What the IMF really means but won't say, is that it is going to take several years to basically build a new banking system with new players – even if the names don't change. Unfortunately, the new system will basically be the same as the old system, based on fiat money, central banking and regulatory privileges for the few. The system will still create and distribute debt-money to the public only through certain insider banks and the biggest difference will be that the financial crisis will have further centralized the power and the destructive nature of Western monetary policy. The more global it gets, the worse it is next time. We hope THIS time that there are serious, extended and international discussions about the wisdom of simply waiting for a "recovery" of the current system. And you know what – our recommendations should be taken seriously. Our track record is a heck of a lot better than the IMF's.