On 28 March 2009, the author of this blog wrote to the British Chancellor of the Exchequer (top Minister for Finance and State Treasury in the UK), Alistair Darling, asking a question:
"What is the size of the liquidity hole in the banking system that the government is currently trying to plug?"
On 1 October 2009 HM Treasury official, Paulette Wright, responded with a lengthy letter listing measures that the UK government has undertaken to ensure the financial system stability, including Assets Protection Scheme (APS). However with respect to the crux of the question the response stated:
"It is not possible to set out estimated costs for certain at this point: part of the point of this scheme is to insure assets the market cannot value at the moment, and due diligence on these contracts is continuing. The Treasury will report any losses through the normal budgeting and accounting process."
Garages and garden sheds up and down the country are full of "assets the market cannot value". They are called 'junk'. Clearly the financial industry have gone bonkers: they hold reserves for cash liabilities not in cash (as if a refinery were holding oil reserves in, say, coal), they call pyramid scheme operations: "value creation" and they call a resulting unsaleable junk: "assets". Where is the limit to this absurdity?
The UK government admitted that it does not have a clue about the size o the liquidity hole it is trying to plug and signed a blank cheque underwriting any future costs of further bailouts.
This resonates dangerously with Joseph Stiglitz' opinion that banks stress tests may not reflect the financial industry health, as he stated: "You worry that the stress test was designed to make sure that they passed."
The signs are that the liquidity crisis is far from over. The financial pyramid that was created by the financial industry and caused this crisis in the first place collapsed only partially. By buying and underwriting massive volume of bogus assets, the government is trying to support the remains that may be far larger than the losses that have already been suffered. It is spending hundreds of billions of taxpayers' money to buy junk, throwing good money after bad. Notwithstanding continued government spending spree on junk, it looks increasingly likely that these remains may collapse causing another liquidity crisis wave, far larger than ones that we have experienced thus far.
Even if these pyramid remains do not collapse, the costs of supporting them are incredibly high, in a long run far higher than taking one off hit of a complete collapse, which may prove inevitable anyway. The scheme whereby taxpayers are paying banks for junk has the financial structure of extortion racket run by loan sharks: their victims keep on paying as much as they can forever.