Denseman on the Rattis

Formerly known as the Widmann Blog


Halfway through?

Collapsing Bank
Originally uploaded by grainofsaltjd

So much has been written about yesterday’s disastrous budget that I don’t think there’s much point in writing more about it. I just can’t wait for Labour to be thrown out!

All the budget coverage has taken the attention away from some other developments, however.

For instance, Edmund Conway had an interesting blog posting a couple of days ago, about how the IMF has written a report on 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.

A few quotes:

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.


But it underlines one simple but undeniable truth: that this recession is different. It is the consequence not of a simple one-nation housing crash or a consumer slowdown but a catastrophic collapse of the financial system. And with that system still in a wreck normal service will simply not be resumed without more costly bail-outs – or else we must accept the consequence that money will be far more expensive to borrow in the future, and that economic growth will be far less in the future.

To anyone with a keen sense of history this should hardly come as a surprise. The 1930s were marked by periods of optimism before reality set in again. The IMF’s verdict may also take a while to sink in, but here it is, laid out in table 1.4 of the report: we aren’t even halfway through the bank bail-out. Gulp…

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