US banks now hold over US$1,000B of cash, which is an unprecedented level and more than five times the typical amount held over the past 40 years. The Big Q: Why? The Big A: Because the banks know that they are heavily exposed to bad loans/assets on their balance sheets and, therefore, they are very reluctant to commit capital to new lending. The European and US governments/central banks can expand borrowing/lending/asset guarantee programs and create asset management companies to buy the financial sector’s distressed loans/assets all they like, but these two courses of action augur serious problems, i.e. the calculation of the transfer price of the distressed loans/assets and the accompanying loss-sharing mechanism between bank owners, creditors and the government or taxpayers.
So, governments will have to inject still more huge amounts of new capital into banks, and perhaps the selective nationalization of weak or insolvent banks, and the sooner it happens, the quicker financial stability will return. An analyst at the Financial Times in London believes that the global banks require at least US$675B of new capital, of which half is probably needed yesterday. To date there is no hard evidence in either Europe or the USA that immediate, direct and decisive government action is taking place to resolve the global banking crisis and, therefore, the eventual economic outcome could still slide from a global recession, which is already largely anticipated by global stock markets, to a deflationary depression. Where are today’s Churchhills, Rosevelts and Thatchers?
Popularity: 7% [?]
