Maybe the only thing that will shock the governments into providing mortgage relief would be to delay our payments for a week, two weeks, a month. That would send a message about who holds the high ground: debt-servicing borrowers whose assets were leveraged into other instruments, and who keep paying and saving. Most experts have it all wrong about what makes the banking system work. It's not about lack of liquidity in notional-value credit default swaps. It's about confidence, about who keeps sending their money to the banks in the form of deposits and loan payments. The real issue is how to keep them doing so, and stabilizing the valuation of their pledged assets is a sure course.
In the United States, mortgage payments to banks dwarf deposits. If that flow of money stops, even for a week, bankers would be flocking to Capitol Hill and demanding stimulus be directed at the borrowers. They would immediately freak out. If the 12 million or so mortgages in the US deemed at risk in the coming year were all bailed out at $60,000 per, enough to get their average debt-to-asset value back down to 80%, that would still only cost $720 billon. A relative bargain. Bankers and regulators aren't far away from seeing the light, and I'll do my part. If you have a mortgage, you can delay it for a week without harming your credit rating whatsoever. What the hell? They can't foreclose on 12 million properties, and truth be told, they don't even know what fund in what country thinks it owns a specific house.
George Soros outlines the brush-strokes of a financial solution in the interview below. Implicitly, he realizes that the cratering unregulated instruments are causing the crisis, the regulated parts of markets are doing their jobs, and they can be decoupled to a large extent. He thinks central banks are starting to stumble their way to a fix, but the most difficult and crucial point in the equation will be halting foreclosures because it goes against current inclination.
Stopping US foreclosures will not stop the center of financial gravity from moving further towards China, Singapore, and India, nothing can do that, but it would establish a floor upon which so many unregulated contracts seek to re-establish support. He's talking sense. and the rest of the interview is at the Huffington Post:
Soros: The U.S. authorities bought into market fundamentalist ideology. They thought that the markets would ultimately correct themselves. U.S. Treasury Secretary Henry Paulson epitomized this. He thought that six months after the Bear Stearns crisis the market would have adjusted and, "Well, if Lehman (Brothers) goes bust, the system can take it." Instead, everything fell apart.
Since they did not understand the nature of the problem -- that the market would not correct itself -- they did not see the need for government intervention. They did not prepare a Plan B.
As the shock of the Lehman failure set in, he had to change his mind and rescue AIG. The next day there was a run on the money markets and commercial paper markets, so he turned around again and said we need a $700 billion bailout. But he wanted to put the money in the wrong place -- taking the toxic securities out of the hands of the banks.
They have finally now come around -- with the government buying equity in banks -- because they see the financial system is on the verge of collapse.
Gardels: Now that the U.S. authorities are at last on the right track, what are the key components of resolving the crisis?
Soros: The outlines are clear. There are five major elements.
-- First, the government needs to recapitalize the banking system by buying equity stakes in banks.
-- Second, interbank lending needs to be restarted with guarantees and bringing LIBOR (London Interbank Offered Rate) in line with Fed funds. This is in the works. It is going to happen.
-- Third, we must reform the mortgage system in the U.S., minimizing foreclosures and renegotiating loans so that mortgages are not worth more than houses. Stemming foreclosures will cushion the fall of housing prices.
-- Fourth, Europe has to fix a weakness of the Euro by creating a safety net for its banks. While initially resisting this, they have now found religion and done it at their meeting in Paris on Sunday.
-- Fifth, the IMF must deal with the vulnerability of countries at the periphery of the global financial system by providing a financial safety net. This is also in the works. The Japanese have already offered $200 billion for this purpose.
These five steps will start the healing process. If we implement these measures effectively, we will have passed through the worst of the financial crisis.
But then, I'm afraid, there is the fallout in the real economy, which is now gathering momentum. At this point, repairing the financial system will not stop a severe worldwide recession. Since, under this circumstance the U.S. consumer can no longer serve as the motor of the world economy, the U.S. government must stimulate demand. Because we face the menacing challenges of global warming and energy dependence, the next administration should direct any stimulus plan toward energy savings, developing alternative energy sources and building green infrastructure. This stimulus can be the new motor for the world economy.
Gardels: At the end of the day, won't we be looking at a vastly different global financial landscape? The U.S. will decline as the top power. It will have, along with parts of Europe, socialized banks and loads of debt. Communist China will be the new financial power globally, flush with capital and a major investor in the West.
Soros: U.S. influence will wane. It has already declined. For the past 25 years, we have been running a constant current account deficit. The Chinese and the oil-producing countries have been running a surplus. We have consumed more than we produced. While we have run up debt, they have acquired wealth with their savings. Increasingly, the Chinese will own a lot more of the world because they will be converting their dollar reserves and U.S. government bonds into real assets.
That changes the power relations. The powershift toward Asia is a consequence of the sins of the last 25 years on the part of the United States.