U.S. Financial Crisis Far More Than A Crisis Of Confidence

[Post Summary]

So is my beloved among the sons.
—Song of Solomon

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At the foundation of any "crisis of confidence" lies sound reason. Conditions affecting a once status quo arrangement are perceived a threat to "business as usual." The sense something critical might give out abounds. So, because consequences entirely undesirable are feared (and with good reason), key actors in the drama suddenly change their behavior.

Therein lies a sketch of the dynamics making for the present crisis rocking global financial markets. The issue, though, is not one of "confidence." Rather it centers on the solvency of various key players.

"Derivatives have introduced a lack of transparency into bank portfolios, creating fear and uncertainty on the part of lenders, depositors and investors alike. This uncertainty has prevented banks from raising capital by selling stock, or meeting reserve requirements by getting interbank loans; and it has discouraged investors from investing in the money market. Banks don’t know whether the money they lend to each other will be repaid, since they don’t have a clear view of the value of the assets carried on bank balance sheets. The result is a crisis of confidence: the players are all eying each other suspiciously and holding their cards close to the chest." — How to Resolve the Credit Crisis: Credit Where Credit is Due by Ellen Brown; January 11, 2009

The global financial system plainly is broken. This simply cannot be denied when the soundness of bank balance sheets — those assets backing liabilities — is being called into question.

And therein lies the lesson of our time. Pieces of paper once endlessly traded and thought viable capital for backing loans are no match to equity stakes in viable, productivity-enhancing ventures. There are practical differences in the quality of assets.

Now ending are the days of equating speculative claims (whose value is determined solely by the willingness of someone to pay up) as being equal in quality to investments in enterprises whose operations serve to raise productive efficiencies.

The final lesson lies in discovery that, it does not matter who (read: Uncle Sam) is "backing" financial assets banks hold on their books. Rather, what matters is the means of producing such wealth as could easily pay these pieces of paper we naively call "assets."

Rather than calling it a crisis of confidence, the changed behavior of key players in global finance is better likened to a deer in the headlights. Despite seeing an oncoming freight train, they simply will not move.

Wisdom advises there is nothing hidden that shall not be revealed. Thus, we have sound reason for calling fools those attempting to "save" the present arrangement and those failing to see the writing on the wall.

There is no crisis of confidence. Rather there is only a bankruptcy of humility and sound reason. With this in mind, then, one naturally wonders how far off is the vile experience of war?

—Tom Chechatka