The IMF had the choice between:
- "a bite the bullet-strategy", let the economic crisis grow worse by letting bad companies go bankrupt thereby creating at the end a healthy economy, alternatively
- "try to revive (with tax payers money) the old system- strategy" by throwing good money after bad thereby risking a new financial crisis in the nearby future.
This blogger and many others want capitalism to do its work: clean and flush the system, get rid of all the rotten apples in the financial industry, cut the ties between Wall street and US politics, etc and start over again. the irony is that it will happen in any case; maybe not now but in a few years time.
Wall street is at the moment busy packaging financial instruments as if nothing has happened. With this they are putting us all at risk.
IMF pushes for securitisation business revival
The Economic Times India
A year after the Lehman crisis and the subsequent crumbling of the global financial system, triggered by the cracks in regulatory structure in the securitisation business, the International Monetary Fund (IMF) has suggested restarting of the same business.
The Global Financial Stability Report (GSFR) released by the IMF on Monday said a failure to restart securitisation would come at the cost of prolonged bank funding pressures and a diminution of credit and a continuing need for central banks and governments to take up the slack.
The GSFR points out we should learn from the past and enhance transparency, especially as regards to off-balance sheet exposures while restarting the securitisation measures. The disclosures should concentrate on materially relevant information and not overburden securitisers or investors with irrelevant data.
Dr Ashok Haldia, former secretary of Institute of Chartered Accountants of India (ICAI) pointed out if this suggestion is implemented, it will be in the interest of every stock holder in the financial system. ”If there is greater disclosure on the off balance sheet items and the stakeholders are not bombarded with irrelevant data , every one will be in a position to take informed decisions,” said Mr Haldia. The securitised products itself should be simplified and standardised in order to improve liquidity ensuring prices better reflect actual transactions.
The report also suggested that the securitiser compensation should be revised toward a longer-term horizon so that the originator of the debt will take more due diligence while giving out loans. This put together with the initiatives already taken by United States of America and Europe to introduce a minimum 5% retention requirement for the originators—who gives the loan—will ensure that someone takes responsibility for diligent underwriting and monitoring.
The strategy for timing and manner of unwinding crisis measures should include managing market expectations and having a clear communications on both when to start and how to execute unwinding strategies.
DK Joshi, principal economist at credit ratings agency Crisil, pointed out that the central banks in many economies including that of India are currently sending out signals to prepare the market for a reversal of the expansionary monetary policy measures. Still the timing and modalities of these decisions would need to be balanced against the condition of financial markets and specifically how illiquid or fragile that may still be.
According to the report, the reversal of the expansionary monetary policy across sectors and across national borders should be co-ordinated to avert chances of a arbitrage opportunities. For government’s financial sector measures, priority should be given to exiting from support programmes that have a significant distortionary impact on financial markets and involve large contingent liabilities for the government.