Thursday, March 5, 2009

We and Others Know How To Get Credit Flowing Again - We Think!

Now that governments around the world have declared they won’t let banks fail, at least certain banks that is, credit should start flowing between these banks naturally at national and international levels. But the credit is not flowing yet and this is due to lack of confidence between the banks.

This lack of confidence is due to lack of timely and accurate financial information (aka transparency) relating to the quality of the balance sheets of banks. Bank A will not do business with Bank B because of fear that B may be unable to honor its obligations due to toxic assets (aka bad loans or derivative positions) or go out of business even though Bank B’s government has bailed it out before.

But if governments (central bank’s, treasury’s, etc) are already acting as an insurer of banks through bailouts what is needed is to go one step further. This need not cost more per se. That step is moving bank to bank lending and borrowing onto a central market place where all transactions are guaranteed by a clearing house. In financial speak, move bilateral over-the-counter interbank trading onto an exchange with a central clearing house and clearing members.

Sure, there would be implementation issues like who would manage the exchange (While Intrade is happy to help ;-) perhaps the G20 could establish), who would be the clearing members and what banks would get trading rights. Also the thorny problems like would or should Ireland be able to join with our current precarious (albeit exaggerated) position? It should also be a pre-requisite for any bank to get approval of their guarantor Government before they can trade on the interbank platform to provide the very best financial information about its assets and liabilities.

Access to the market would create massive incentives for governments and banks to “come clean”. The incentives are access to credit and comfort when giving credit. If Japanese banks had such an incentive in the 90’s would they have recognized their debts earlier and would this have shortened their lost decade?

So, if what is needed is more transparency and trust then use an exchange with a clearing house. They work elsewhere. They have a big role to play here now we think.

What do you think?


Intrade said...

howard said :

    "So, if what is needed is more transparency and trust then use an exchange with a clearing house. They work elsewhere. They have a big role to play here now we think."

Transparency has value, and it begins at home. What do I have to do to get Intrade, an exchange that purports to value transparency, to answer a question I have posed on emails and on the forum? The question relates to an Intrade admistrator's statement that market makers on Intrade receive discounts on certain fees. I have asked repeatedly whether this includes reducing the $200 "protest fee" associated with unrepresentative pricing".

Where do I need to go to get this question answered?


Intrade said...

dennyboy said :

    hey john, would like to see the odds on mark to market rules being changed!

cheers, dennyboy obrien

Intrade said...

Lynx said :

    So you want to make money and help the economy? Existing banks have squandered their capital on poor investments and are now screwing business to compensate. So now is the time to start a new bank not saddled with debt that can invest the billions on savers money.

Intrade said...

jeffreyjh2 said :

    I think suspending mark to market accounting would stop the downward spiral -- without this suspension capital will not flow freely.

Can you put a mark to market on the board?


Intrade said...

jwb said :

    Very odd everyone is commenting about doing away with mark to market when this article claims the very problem is a lack of transparency about the bad assets. While I'm as eager as anyone to speculate on the demise of mark to market, what is the logic behind solving a crisis of trust by papering over losses?

Intrade said...

F4DevilDog said :

    You are only suggesting yet another centralized government effort. This would put more power into the hands of government - government that has continually failed and government that nobody can step away from. At least we can walk away from failed business and set up new business.

Why don't you consider a method that focuses on freedom for individuals rather than more power for government and banks?

Intrade said...

Reply to JWB said :

    I dont see this as papering over losses at all. The opposite.

It forces losses to be recoganized which is a good thing.

Intrade said...

nancylgeorge said :

    I am wondering just what F4Devildog had in mind for "a method that focuses on freedom for individuals rather than more power for government and banks." Because I think that the second great American depression of 2008 through whenever has made conservatives, let alone libertarians, irrelevant. Regulate the banks, don't eliminate them.