Global Financial Crisis: ¿Is there a solution?

by Luis Bravo Villarán, March-April 2009

“If you want to remain slaves of bankers and pay the cost of your own slavery, let them continue to create money and control credit in the country” … Sir Josieh Stamp 1880-1941

The FED founders: Rochefeller, Morgan, Wartburg and Rotschild

“The impact of the Obama plan would be seen toward the end of 2010, because the main problem confronting the plan of economic stimulus for US $ 787,000 million is the lack of credibility. If the market is not persuaded, no matter how much money will be made available -more and more money- and expectations will continue to drag down. The Economist published a study of the GB-Congressional Budget Office that forecasts that the aid package could achieved the expected impulse only towards the end of 2010”.

This forecast and the chain of requests from various corporations in crisis (such as Chrysler and General Motors) is affecting the confidence of American citizens. While uncertainty does not dissipate, no one (except the very reckless always in the spot) will go for investing in sectors linked to domestic demand in the US as textiles and agribusiness ...”

From “Investigacion y Gestion Consultores” (Peru)

The great problem of the crisis –out of not being established in its true dimension- is that solutions are being sought through the injection of money to financial institutions which performances are precisely the cause of this debacle. If such a galaxy of "gamblers" (operators of the "global casino") who dragged the world to the darkness under the receipt of "free market" (when in fact what was being done was an extreme debauchery) and that so famous idiot phrase (or for idiots), "Do not worry that the market fixes everything" (when in fact young rogue traders were disorderly or irresponsibly fixing –or unfixing- deals in search of higher returns to their peers –the bankers- along with bonds to their pockets).

¿By chance it may be thought that this "confidence crisis” could be overcome by doing what the US and EU governments are doing injecting money (over issuing money bills) in huge quantities to banks (.. and AIG)?; ¿by chance some one may believe that there are random bailout prescriptions of economists who have never experienced a crisis like this; when if not all, almost all were wrong or remained silence some by interest and the others by ignorance; and those who had timidly foresee what came, did not raised their voices high enough and/or on time?.

The big problem today is how to avoid acknowledging that the "system" failed, collapsed, hopefully this would have been plunged into when the chain of crisis in 2000-2001. Nasdaq in year 2000 and then in 2001: S-11, Enron, World Telephone, airlines (Ch-11), etc. By that time government avoided any American bank to fall in order to keep the "system" in force; then disease would have been detected at an earlier stage and the damage would have been minor and possibly healed through a more effective control; but what was done was to inject large amounts of dollars to the market to continue the "gambling" ... and the gambling continued strengthen by the "system double standard" in the secondary markets where the SEC only regulates securities traded over more than 270 days; naturally each piece lasted up to 270 days through the "Commercial Papers” that were backed by packaged mortgages cut in small slices and traded by means of computational models again and again every day, generating small daily returns but for (up to) 270 days ... It was first money backing money ... then packages of mortgages (in fact “occupied non-productive assets” whose profitability was the result of speculation in the mortgage market, so absurd, because the mortgage debts had a limit: the payment committed and the ability to perform it) ... up to money without any backing other than papers. All these unsupervised, unregulated. Here there are two great responsible: governments for allowing these types of transactions and banks for performing them without limits and without the slightest regard to ethics or to the MARKET.

The solution here is not inject money (from Treasury) into banks and restore their ability to continue to manage what they have handled so bad throughout so many years. Here what should proceed is to be transparent and this is possible only after recognizing the true extent of the crisis in each country (mainly in the US and the EU).

¿Who has created this spiral of huge losses?; it is clear that they were the banks.

Now and due to desperation the bailout program of $700 billion approved last year is being delivered to the banks (and of course also to AIG) along with fostering them to go into secondary markets presumably in search of that gambled hidden money to inject it to the market … so gamblers are requested to save the casino; but as both gamblers and casinos have lost, the government rescues them to continue with the gambling (?); ¿would it be the correct way to recover market confidence … or simple the way to restore the losses to the casinos owners?

¿What is needed for the market (a demonized term, but real) to regain confidence? … The only possibility is to give access to money in order to meet the people needs (increased demand) and this would only be viable with more "income" for individuals (no with credit cards). But as this does not seem to be possible at this time because of the mortgage crisis, what may be explored first is how to lower the pressure to collect from them what they can not afford, but not through the purchase of their debts by the Treasury that would pay the banks, as this is "more of the same”, but through a careful study to transfer the debt titles from banks, to a “special trust” (may be one main trust organization with autonomous branches in each state); then the banks would become beneficiaries of the trusts and there will be no writing-off in their balance sheets. In the meantime, pending the recovery of the payment capacity of individuals and families, also can be set -in stages- special contracts for rental of occupied houses whose product enter to the trusts (collection subordinated with special conditions) and gradually to the banks according to a design to be agreed.

¿Will there be bankruptcies?; here it can be designed an exceptional way in which regulation can minimize or avoid this possibility, so that banks will also recomposing along the time; and indeed, allow the opening of new banks with capital raised from various sources duly evaluated by the supervisory body.

¿How to activate the productive sector?; of course banks must be the articulators of the payment chain within the market and thus channel the money to the economy, but opening the availability through a sort of “triangular type of credit lines” under the control of the trust entities gestating a new collateralization system -"changing the paradigm”- which means to leave behind the already sold out "mortgage system paradigm", and cover the whole range of actors, from individuals, families, through small, medium to larger businesses. Henceforth avoid the establishment of "mortgages" and removing them from the hands of banks ("judge and party", a source of abuse that ended with the disaster that has been witnessed since 2007) and giving the arbitration to the trusts.

In this way governments instead of intervening in banks ownership, would begin to exercise control through the trusts and then become the "great trustee". This could be done immediately by creating public-private trust entities in each state that will exercise the arbitration and control over financial transactions independently of the banks (lenders that will become trust beneficiaries) and the borrowers (credit beneficiaries). A fourth player would be "risk managers" firms (no risk-rating agencies, which is different), to assist clients in the pre-assessment of their risks to properly present their operations to the trusts and banks supporting them as part of the new system monitoring and controlling the credit risks in the operational phase. Insurers will continue in their role of traditional risk takers of those risks likely to be economically transferred; conforming in this way a free, healthy and transparent new system with greater chances of success than the traditional exhausted system. Assets control through independent patrimonies and cash flow subordination within the fiduciary system by the trust entities, will guarantee banks the operations without any danger of continuing gambling in the money market the as they have done with the mortgage packaging type of securities. In this way control will be automatic and all stakeholder interest protected.

An additional role for the governments (or states) is to create "corporate guarantee funds" to be managed by fiduciaries (trusts), for different levels of economic activities, mainly small and medium enterprises, so as to cover the risks of starting new productive initiatives properly evaluated until the formation of their assets and the generation their cash flows, then the whole operation goes into the trust system while the credit is at risk. With this new or revitalizing existing initiatives, employment would be generated and thus the CONFIDENCE regained but through a NEW SYSTEM.

Money instead of going to rescue bank (bailout programs) within a exhausted system would go through a healthy and transparent system (trust guarantee funds and secontier banking type of credit lines with the intermediation of commercial banks) to bust the economy restoring the payment capacity to a market plenty of new opportunities.

To think that this is the solution may be presumptuous; but this could be indeed the outline of a possible solution with financial tools available that would eliminate (or at least minimize) the arbitrariness and debauchery that has turned into this unprecedented costly global financial crisis.

¿Does this initiative will have costs?; of course there will be extra-costs due to the presence of new stakeholders: trusts, secontier credit banking, risk manager firms (that will assist the market to present initiatives facilitating –filtering- evaluation to trusts and secontier credit banking, and elaborating statistical data to economically manage small business operations). But that cost will generate new specialized jobs that will allow re-launching of a transparent economy; besides, the control of financial transactions will be inherent to this new proposed system; and in the other hand: ¿what cost is being paid right now for the traditional system?

Drastic measures: minimize speculation (reinforcing transparent arbitration) and the generation of high yield fictitious returns without any backing. To this end, capital and money markets should be strictly regulated with closer monitoring. Secondary money markets should disappear and with them the high yield programs where much of the current crisis may be still hidden, as we have witnessed the explosion of the "housing bubble", but what about the "corporate" one?

Something fundamental is urgently avoid the gambling with “foodstuff derivatives". The worldwide products trading markets should work with simple backed "futures contracts" duly controlled and monitored, in view that "rogues traders in financial markets" are increasingly pointing to that market and with the same known techniques for making decisions to buy and sell (no food, but securities backed by delivery of food) and make more money through it. What is next? Clearly the spiraling increase in international food prices in order to pay returns that these title markets will demand. The result at first will be a higher inflation in food prices (we have recently witnessed this effect as a result of speculation in the years 2007-2008, not as falsely reported that this was due to an increased foodstuff demand from India and China); and then ... –God save us- an unprecedented world hunger?.

Again:

“If you want to remain slaves of bankers and pay the cost of your own slavery, let them continue to create money and control credit in the country” … Sir Josieh Stamp 1880-1941