“If it ain’t broke, don’t fix it”, the old cliché tells us. But what if it really is broke? You can alleviate the symptoms but you can’t cure the disease while the root-cause remains.
On the economic front, cries for stimulus and growth will remain forlorn while the dearth of credit persists, and monetary systems in the US and Europe, “broke” (in both senses), continue the practice of flooding banks with fiat-money vouchers.
The ensuing burden on state coffers may be tolerable while interest rates are near zero, but the reckoning will come when the rating of government debt begins to wobble. “It will be alright on the night” remains the policy of choice.
It doesn’t work, anyway. The newly-minted money, supposedly intended to lubricate the economy’s engine room, is instead chanelled to banks whose balance sheets remain overloaded with toxic debt.
According to Andrew Haldane, the Bank of England’s director of financial stability, much of the blame falls on accounting rules that “prevent banks adequately provisioning for future loan losses”, incidentally making it impossible to price bank shares. The problem for investors, according to Mr Haldane, is not that banks are too big to fail, but “too complex to price”.
Most of their balance sheets remain vastly inflated
Under current rules a bank’s loan losses are realised only when the asset in question is sold. Reluctance to take the hit therefore means that most of their balance sheets remain vastly inflated. As Sir Mervyn King put it to the House of Lords, this “doesn’t seem to me a very sensible or prudent basis to make business decisions”.
Federal prosecutors in New York have just slapped a $1 billion lawsuit on Bank of America on the basis that they fraudulently removed the checks on whether borrowers could afford the loans being thrust upon them. At the end of last year Barclays admitted that the fair value of its loan portfolio was almost £15 billion below its balance sheet valuation. The equivalent at Lloyds was estimated to be over £17 billion.
Whose running the asylum?
Control over the entire monetary system is entrusted to the perpetrators of this fiat-money generating scam. Under fractional reserve banking only a small percentage of deposits is held in reserves. The rest is lent out at double the rate of interest. Those loans, in turn, will be deposited somewhere and the process repeated, creating yet another tranche of money that represents nothing but the thin air from which it was conjured.
The illusion is sustained only by the public’s belief that it represents sustainable purchasing power. But the inflationary whirlwind will be reaped. The US Federal Reserve, in its 99-year history, has succeeded in robbing the dollar of 95% of its purchasing power – so far.
Between September 2008 and December 2010, in the EU alone, 182 banks had to be given liquidity or debt guarantees by their governments, just to survive. Not one of them received a qualified audit report prior to the crisis.
Auditors work to rules that dissemble the law rather than meet it. Despite being tasked to adopt truth and fairness as their sole benchmark, auditors perilously equate this to compliance with standards.
So a bank, saddled with a mountain of worthless debt, can comply with the letter of every standard and publish a set of deceptive accounts – with an equally worthless audit opinion.