The governments are eager to tell the market it is 'almost over' and the world wants things to go back to 'normal'. But what is normal?
To these economies, normal means (very simply), the bank has money to lend to customers who show a decent ability to pay back the loans plus interest. The customers then go out and use the loan money to spend resulting in a GDP growth.
When the crisis hit, the banks don't have inventory - money - to loan out. Because they've lost too much money in bad investments. Without loans to give, they have less business, the consumers/businesses have less money to spend. There's no GDP growth and no GDP growth for 2 months is defined as a recession.
To fix it, central banks around the world just print more money and get it to the banks. At thisw time of writting, it seems now the banks are flushed with cash. But they still aren't eager to loan out. Why? Because being bitten by the bad investment they're cautious who they loan to.
- They can't loan to other banks now because evem the bankers do not trust other banks. This is because no one knows how much they have lost in the bad investments. How much are the bad investment worth? How much is that piece of paper worth? Who knows?
- They can't loan to the good customers with good track records because now they are suspicious if they can pay? What if they too lose their job?
- They can't lend more to bad customers because that's what gotten them into this mess right? Who knows? And the bad customers already have so much NINJA loans - no income, no job or assets.
So who can they loan to? Without more money in the market, people can't spend. No spending, no growth, no GDP = BAD. In short, there is a lack of confidence in the market.
Now to fix the 'confidence'. Some accounting rules are changed to prop up the balance sheet. What was 'mark to book' was then changed to 'mark to market' and then 'mark to model'... and then now to something else. The bad investment, since no one knows how much it's not worth, is written off to partially. I'm not sure how all that accounting is done (you can see here) but the result -- Citibank was able to report profits. Wells Fargo, JP Morgan...etc are stabilizing. In layman terms, they just pressed the 'delete' button on the bad investments.
PURE Hollywood magic in Wallstreet.
Next week, the stress test result of the banks will be out. (Last month, US treasury conducted stress tests on banks in America to see how strong they are, if they still need extra cash...etc). I predict that the 'important' banks (you can tell who is connected and who is favoured) will pass with flying colours. Then someone important, Obama most likely, will say "... I believe USA has the best economy system, our banks are the strongest in the world and... " *drum roll* the end IS very near....
Confidence is further boosted. The market will most likely buy it. Someone shout "make me a believer!" The market rallies, stock surges up....
But still the key question is, how to get ppl to spend? Who are the bank going to loan to? Unless they issue out more NINJA loans, create more business very suddenly and quickly this process is going to take time. Unemployment rate is at a very very high level. (see my previous post here). Without employment, loans are hard to give out... not that they wont be. There are lots of NINJA out there.
So the key indicator for me to watch out is the unemployment rate. If it goes down for a sustainable period, we're out of the woods, sort of.
No one can keep spending and incurring great deficiet to keep growing. McD grow by making profit not by having more debt. One day this gigantic bubble will burst. Perhaps then, we will have a unifying currency. Scarily, that's what the bible predicts.
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