Wednesday, October 29, 2008

Buying time

is the core strategy that the world's public authorities have developed to deal with the global financial crisis. Call it a liquidity issue for as long as possible, then admit it's a solvency problem only when smacked by the dead fish of a school of floundering institutions too big to fail. Now that those institutions stopped serving the social purposes that entitled them to preferential treatment, step in and do the job for them, to keep the wheels from coming off.

But that's all it does. It keeps the wheels on, but they're spinning, losing traction, and the jalopy is skidding into the ditch.

The bedrock problem is that the financial institutions of the Western world are collectively insolvent. Yes, there are sound insurance companies, and leasing operations, and community banks, and so on. But the institutions that molded and drove the capital markets are, as a group, insolvent. That isn't the end of the world--Japanese banks stayed insolvent for a decade and it's an open secret that most Chinese lenders are sitting on mountains of bad domestic loans made under political duress (maybe duress is not even the right concept, the loans were extended at the direction of governmental authorities--not necessarily the central government, either--to further political and social developmental goals). An insolvent global financial system is not the end of the world, but it's a new problem for the world. Who issues letters of credit to finance trade if everyone is insolvent? For that matter, who honors them?

Buying time is probably the best of a set of bad alternatives. But don't call it a policy.

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