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by, 8th-August-2009 at 11:01 AM (1633 Views)
World at risk of 'double dip recession'
** the entire report has almost been transcribed here as I found it to be quite profound on my "feel", especially after reading the book on "Currency War" where the author was espousing various conspiracy theories ranging from the outcome of Napoleanic war to the not so distant past incidents like the approval of oil embargo in exchange for the US$ being used as the only oil currency thereby ensuring the US$hegemony, etc...Adrian Blundell-Wignall is the deputy director of financial and enterprise affairs at the Organisation for Economic Cooperation and Development (OECD).
In an interview with ABC Radio's PM two years ago, Dr Blundell-Wignall warned there was a giant rolling bubble of excess liquidity moving from market to market, inflating asset prices.
He warned unless the problems causing it were addressed, it would eventually burst with devastating consequences. And it did.
Now Dr Blundell-Wignall - who stresses these are his personal views and do not necessarily reflect those of the OECD member states - says the lessons of history are clear.
First, guarantee bank deposits and funding. Second, remove the toxic assets from the banks. Three, recapitalise the banks. But he says the world has ignored step two.
"Did we remove the toxic assets from the balance sheet of the banking system, anywhere? No, nowhere," he told ABC Radio's PM program tonight.
Instead, he says, governments and regulators have conspired in the use of a magicians' sleight of hand to hide the toxic mess.
Changing the rules
He says for example, the United States changed the accounting rules so banks no longer had to state the current market value of the toxic assets and no longer had to declare losses.
"If you can change the accounting rules and say, 'hang on, we don't have to declare any losses on this $700 billion, $800 billion, we can now declare that they're all book value'," Dr Blundell-Wignall said.
"So, it's really there and all those losses are going to be there but we don't have to declare it, and we won't have to raise any capital for it; it'll kind of be there just hidden behind the silk screen."
Dr Blundell-Wignall says the toll of bad loans is going to get worse, because claims of a US housing recovery are a false dawn.
"Every time the unemployment rate goes up when someone losses their job, they can't pay; obviously you can't; that's one of the biggest determinates of people having to default on their loans, and house prices being the other one," he said.
"It seems to me like there's still downward pressure there and we know the unemployment rate's going to lag the US by 12 to 18 months, so we know it's going to keep going up.
"So, bad loans are going to continue to happen; that's the credit crunch aspect."
He says Europe's banks are worse, with double the leverage of America's.
Dr Blundell-Wignall also says the efforts to rescue the world through massive fiscal stimulus and bank bailouts are unsustainable.
"When you add up the capital injections, the loans, the guarantees, the Federal Reserve actions and guarantees and so on, what you see there is the US has taken from the private balance sheet and put onto the public balance sheet, not 11 per cent of GDP, 80 per cent of GDP is what that all adds up to," he said.
Dr Blundell-Wignall says to top it off, there is a huge asset price bubble building in China and some other parts of Asia in the stock market and in property prices.
"So another one of the balls that has to be kept in the air is can China allow the bubble to keep bubbling? What we're talking about here is a race," he said.
"We've got to keep all those balls juggling in the air while the banks get rid of their underlying bad debt problems, whether they admit to them or not with the change in accounting rules."
He says there is a clear risk of a double dip recession and another credit crunch, but it is possible the world will muddle through, though not to healthy growth.
"If you can do all those things and the juggler on the stage does not drop one of the those balls, then you can see how you would muddle through," he said.
The current practice of the US govt's steadfast rescue of a few of their major banks at all cost calling them too big to fail, and by shifting bulk of the private debt to the public, and with the approach of QE, forcing the burden of shouldering the American debt to the rest of the world, in particular, to the US$ creditors, and now with this view of a Chinese property bubble and the ever increasing US debt (2.3 trn) and the incessant inflow of hot money - it's all reminiscent of how the Asian financial meltdown was created resulting their economies crushed - if you believe what the author is espousing...
All these conjectures are into the relatively far away future, but meantime and in shorter term, my gut feel all these while has been this global market rally is all about a "giant excessive liquidity created as a result of QE, roaming this earth searching for a market ripe for a speculative profit within a short time before moving on to another, gathering momentum and mass before it is halted by an invisible hand, resulting in great profit for some but disastrous result for many!"
Whoa! Look like it's time to hide?