But before ringing in the New Year with a rather grim foreboding, let me at least describe what financial markets came to know as the “old normal.” It actually began with early 20th century fractional reserve banking, but came into its adulthood in 1971 when the U.S. and the world departed from gold to a debt-based credit foundation. Some called it a dollar standard but it was really a credit standard based on dollars and unlike gold with its scarcity and hard money character, the new credit-based standard had no anchor – dollar or otherwise. All developed economies from 1971 and beyond learned to use credit and the expansion of debt to drive growth and prosperity. Almost all developed and some emerging economies became hooked on credit as a substitution for investment in tangible real things – plant, equipment and an educated labor force. They made paper, not things, so much of it it seems, that they debased it. Interest rates were lowered and assets securitized to the point where they could go no further and in the aftermath of Lehman 2008 markets substituted sovereign for private credit until it appears that that trend can go no further either. Now we are left with zero-bound yields and creditors that trust no one and very few countries. The financial markets are slowly imploding – delevering – because there’s too much paper and too little trust.Please re-read his comment about creditors that trust no one and financial markets with too little trust.
Why has trust evaporated from the financial markets?
As this blog has observed many times before, on August 9, 2007, the financial markets effectively shutdown for every type of opaque security. This list includes mortgage backed securities as well as unsecured bank debt and equity.
Quite simply, buyers went on strike.
Since then, central banks and governments have tried numerous programs to try to get the buyers to end their strike. Predictably, all these programs have failed.
The cause of their failure is the same. None of the programs addressed the issue of restoring trust.
There is only one way to restore trust: provide ultra transparency.
Providing anything less than ultra transparency will not see the buyers end their strike because they have learned from structured finance securities like CDOs that what they cannot see and therefore evaluate can and will cause investment losses.