Financial institutions are reluctant today to engage in new credit operations in favor of the most creditworthy debtors, banks even refusing to lend to one another despite the often massive injections of liquidity provided by the states.
This aversion to the risk – incomprehensible and even scandalous – coming from establishments which find themselves in such a position because of the very risky risks incurred in the recent past – is in fact derived from the “toxic” assets held by these same institutions, ‘It is impossible for them to value today! In these circumstances, what bank would lend credits to one of its sisters who is not in a position to quantify the state of its losses or – at least – of its liabilities? The interbank credit market, ie loans between banks themselves, is therefore not likely to resurface once a certain number of players can only estimate valuation very randomly – The degree of toxicity – of the securities held, despite the various extensions, guarantees and credits granted by the States!
Thus, despite the fact that some consumers still manage to benefit from certain loans, the economy can not be restarted without a frank and generous recovery in the credit market even if a certain percentage of these future debtors are inevitably lacking … Paralysis Of the credit market forces our economies to a stalemate that is prompting our Governments to charge companies that have received public funds that they can not use by making new loans. Because the financial institutions affected – that is to say almost all of the world’s so-called developed institutions – prefer to cling to the tangible and real assets they still have, rather than making them available to other banks or companies a credit.
Worse still, this aversion to risk is in no way diminished or moderated by the massive State aids because these funds are instead placed by the banks that benefit from them in insubmersible assets, such as the Treasury bills, in place of This situation becomes totally blocked when the banks of a country are asked by an institution in a foreign country if it is true, if it is already very difficult to Quantify the liabilities of an establishment located in the same country, it is impossible to gauge the losses of a foreign establishment!
Adam Smith (1723-1790) described a similar situation in which the English and Scottish merchants preferred to abstain from engaging in uncertain operations American colonies deemed too risky in spite of much better returns than their local operations. These merchants therefore favored less profitable but safer operations, such as financial institutions which today invest in government bonds with insignificant returns rather than engaging in new, more remunerative loans, Certain degree of risk.
However, the understandable mistrust of these merchants resulted in local investments that benefited the country directly, with national enrichment and more jobs. According to the famous metaphor of Smith at the time, it was the “invisible hand” (ie, God or Providence) that urged these merchants to invest in the national economy. Nowadays, our analysts would more prosaically talk about market theory – in this case risk aversion – instead of Smith’s mystical qualification to explain the fear of these traders to place their holdings in distant lands.
Similarly, there is no invisible hand at work with our current bankers: The change of personnel – even at the highest level – would not lessen this reluctance because replacing a CEO or a board of directors would not eliminate the assets rotten! Suspicion, mistrust and fear are companions that our bankers are not about to get rid of, despite the taxpayer’s generosity!