30.9.09

IMF Gets High With Its Friends

The IMF is in high spirits, for the first time cutting its estimates of the money lost in the financial crisis.

But in a blow to Britain, the IMF has restated its view that the banks and government face losses of £180 Billion or more from the near collapse of the financial system.

Back in April, on the eve of the G20 summit in London, the IMF said Britain faced losses of up to £200 Billion. Howls of protest from Downing Street forced the IMF to recant, cutting its forecast to £130 Billion in what The Times called a "huge embarrassment". The sheer cost of Britain's bailout remains stubbornly high.

IT'S A MONEY CIRCUS

The IMF says asset prices have gone up so the bad debts are smaller. For the first time since the crisis began (excluding its temporary backtrack on the UK), the IMF has cut its estimate of losses from the financial crisis, from $4 Trillion to $3.4 Trillion.

Huge sums of government bailout cash, up to $3 Trillion from the US government alone, have supported asset prices. That has led to a sharp rally in asset and share prices over the past six months.

News that the previously gloomy IMF is getting a little high with its friends is likely to boost the markets even further. It's a virtuous circle but the world's only going round because governments are printing huge amounts of cash. It's a money-go-round, a money circus.

Something’s not quite right.



It's not just about assets versust debts. It’s also about the worth of those assets to companies, individuals and the economy. And whether the price reflects that worth.

Until asset prices (office blocks, plant, equipment, goods, and the securities based on them) reflect their ability to produce value, the economy is not going to function effectively. Companies simply won’t be able to borrow against them.

The government bailouts have stopped that happening. With printed money, they are trying to hold asset prices as close as possible to where they were in the boom, instead of letting asset prices adjust to the future productive needs of the economy.

FRAUD, POWER AND INFLUENCE

The IMF admits this. While “systemic risks have been substantially reduced,” it says “credit, however, remains strained, while household and financial sector balance sheet pressures and ongoing market dysfunctions remain drags on the recovery.”

Why are governments and banks reluctant to unravel the tangled web of overpriced assets? Partly because they cannot. The banks and ratings agencies inflated the value of assets (said they were worth more than they truly were) but to do that they required very complex mathematical jumbles (that's what some securities are) and they simply cannot unravel them.

Partly, they dare not unravel them because to do so would reveal fraud. And some of the people involved, even unknowingly, with these frauds have power and influence.

LOSSES STILL TO COME 

Since mid-2007 banks have written off $1.3 Trillion. That’s the fall in the value of loans and other ‘assets’ based on sub-prime mortgages and other securities they created, lent and bought. The IMF says there’s another $1.5 to 2.1 Trillion still coming in “actual and potential writeoffs”.

Surely, if that had been written off, asset prices would not be where they are? Well, that’s where the bailout fraud comes in. Governments have bailed out banks with huge sums of taxpayer money without requiring the banks to come clean on how much money they lost and where they lost it.

UNPRICKED AND REFLATED

Former investment banks, or FIBS, like Goldman Sachs are claiming to have returned to profit without having to account for the tens of millions they lost with giant insurer AIG, because the US Federal Reserve paid off those losses.

Now if this isn’t the definition of a bubble, unpricked and reflated, I don’t know what is.

At some point the losses on unproductive assets, priced way above their value to the economy, and now largely owned by the taxpayer, will have to be accounted for.

You cannot hide that debt forever. The financial sector has succeeded in concealing the extent of its own losses – admitting to less than half - and blatantly refusing to acknowledge that the rest exist.

Governments, in providing the bailout cash while failing to ask questions, have aided and abetted in covering up the scale of the fraud.

It’s the beauty of off-balance-sheet financing. After all, if you don’t count what you lost, you didn’t lose anything, did you?

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