from Follow the Money

Lost prestige

May 18, 2009

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"Banking is the industry that failed. Banks are meant to allocate capital to businesses and consumers efficiently; instead, they ladled credit to anyone who wanted it. Banks are supposed to make money by skilfully managing the risk of transforming short-term debt into long-term loans; instead, they were undone by it. They are supposed to expedite the flow of credit through economies; instead, they ended up blocking it. The costs of this failure are massive. Frantic efforts by governments to save their financial systems and buoy their economies will do long-term damage to public finances. The IMF reckons that average government debt for the richer G20 countries will exceed 100% of GDP in 2014, up from 70% in 2000 and just 40% in 1980."

The Nation? Nope. The Economist. Andrew Palmer of the Economist to be precise.

Now that the IMF estimates that the losses from the last credit boom will be close to $4 trillion -- with two thirds of the losses coming from the world’s banks -- it is rather hard to argue with him.

Yet only two years ago, the financial system of the US -- and for that matter the UK -- were the envy of much of the world.

Securitization was thought to have protected the core of the financial system from the risks associated with the rup-up in home prices (see paragraph 5 on p. 8 of the IMF’s 2007 assessment of the US) China, as Peter Goodman reminds us, wanted to import Anglo-Saxon financial know-how to help strengthen its banks.

Some things haven’t changed over the past couple of years, but an awful lot has.

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