I have read the newspaper reports and analyses; I have surfed the web commentators and blogs; I have watched and listened to the pundits and experts; I have followed the unfolding events.
But I still have not come across a clear explanation for the current banking crisis. And without an understanding of a problem, how can one chose one proposed solution over another?
As far as I can tell, at bottom it is about trust. The banks just do not want to lend to each other. The banks do not feel confident; the banks lack trust.
If this is indeed the case, then it is hard to see how legislation, and taxpayers' billions, can alleviate the problem.
One cannot legislate to make people trust one another, just as one cannot legislate to make people love or hate one another.
If such things were possible, then politicians would legislate to make us trust them.
Tuesday, 30 September 2008
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1 comment:
I think the billions are meant to be an insurance pot, so the banks don't have to trust one another explicitly.
If I lend you money, I want a reasonable assurance I'll get it back. If you might go bankrupt, the risk is too high. At the moment, banks are probably unable to calculate their own worth, let alone that of a counterparty, so are unable to "meaningfully" assess the risk of a loan to another bank.
By guaranteeing to buy up toxic debt as and when needed (which I think is what they're promising... difficult to tell from the media hysteria), the govt is trying to provide assurances to lenders that the risk is capped. The pots of cash are there to get the credit market flowing again, to give the banks time and opportunity to build up trust again.
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