The government policy of not requiring banks to write down their assets to market values does nothing but prolong the economic crisis. In a desperate attempt to pretend that the economy is getting better, the government is doing anything it can to inflate economic results, postpone consequences and defer what is inevitable.
The banking charade has been called “extend and pretend.” It allows banks to “extend” their survival by “pretending” that their assets have values well in excess of market. It cannot work! The toxic assets, one year later, are just as toxic or more so than they were a year ago.
Markets will eventually prevail, and the next banking crisis will be much worse than what we experienced in 2008.
Tyler Durden, in a post dealing with this issue, contrasts the current approach with Volcker’s approach to the banking crisis in the early 1980s. He concludes:
Therefore, once the era of Musical Chair Trading ends with some ridiculous non-event that will send everyone panicking, the banking sector will be right back where it was on Septmber 18, 2008—the only difference, of course, being that Bernanke has already shot his wad, and politically, it will be impossible to pass another TARP.
That’s when the world ends—the second crisis will be loads worse than the one in the fall of ’08. Loads worse, even, than ’29.
When will it happen? I don’t know. Then again, I don’t know when the Yankees will next win the Pennant—but I’m pretty sure it’ll happen.
“Extend and pretend” could have been used to do what Volcker did in ’82—the Volcker Call. But Geitner, Bernanke, Summers, and ultimately Obama himself lacked the will or the gumption to force the banks to do what needed to be done—clean up their balance sheets. Write off all that crap.
So get ready: The countdown to oblivion was paused by “extend and pretend”—but it wasn’t suspended, much less averted. I don’t know if the end will be hyper-inflationary or mega-deflationary… .
neat stuff, cheers man