“…While every bank tries to pass the toxic parcel on to somebody else, the system has to find the money. So will compensation for the near valueless contracts and thus now uninsured debt ultimately be made – and by whom? And because nobody knows – not the regulators, banks or governments – who owns the swaps and whether they are credit-worthy, nobody can answer the question. Maybe holders of insurance policies will get the cash due to them, but will that weaken somebody else? The result – panic.
This is the ultra-dangerous downward vortex in which the system is locked. It is why share prices are plummeting. As recession deepens, there will be defaults on securitised bonds and the potential collapse of more banks outside the G7 ring-fence. Nobody knows what proportion of the $55 trillion of credit default contracts that have actually been written will be honoured and who might bear losses running into trillions of dollars. Buying new contracts to insure against default has become prohibitively expensive. Securitisation, and insuring against risk, has effectively ceased. And because the markets don’t know where the losses will fall, banks cannot borrow from each other except overnight or from their central bank. Credit flows are at a standstill. Property prices are plummeting. A famous economist, Hyman Minsky, foretold that unregulated finance capitalism inevitably ends in a meltdown and slump. The world is facing a Minsky moment.” – Will Hutton, commentary in The Observer