Debt Crisis? No, Trust Crisis

Back in 2007/2008, when the Capitalist banking system collapsed generally and globally, most pundits at the time who were broadcast widely proclaimed it as a “liquidity” crisis. Simply step in to socialise the losses, swap several trillion of private debt for public fiat currency and sovereign obligations to the bankrupt financial edifices, and business-as-usual would re-emerge (Ireland tried all those doctrinaire approaches, with notable failure). Emergence didn’t happen, the massive imbalanced outflows to China and other centrally planned economies continued, and we were then told we were experiencing a “debt” crisis. Now, with most Governments having effectively set their fractional lending rates at near-zero, global corporations caopable of arbitraging debt- and capital-ratios between economic blocs have reported eight or so quarters of historically exceptional soaring profits with several trillion dollars/euros retained on books and virtually no new investment in Western/developed infrastructure or job creation.

So now here we are in 2011. After 30+ years of the long, slow eradication of the public commons of regulations and compulsions erected during the 1930s and post-1945 and designed to force financial relations between developed nations into something approximating trust, we now have a situation where, simply put, the world’s largest financial edifices (banks, sovereign govts, hedge funds, bond funds) simply cannot trust each other. They have no common shared set of principles or accounting or ideology they can rely upon. Having fought so long to remove “regulatory oversight”, they huddle in the new light of utter freedom-to-dissimulate and can’t trust even exchange notes from each other. So they desperately seek trust in other forms – as quantified, “AAA” bond ratings. As Felix Salmon points out, as recently as a couple of years ago, “AAA” bonds (assumed to be effectively “risk-free”) accounted for 50-60% of all bond issuances by volume. As Salmon notes, to imagine that over half the bonds issued every year have no credit risk is absurd. Credit is risk. By trusting nobody, they have ended up trusting everybody. By eliminating sovereign oversight and regulatory compliance and basic trust, stratified risk has been blurred into globalised, systemic risk, yet again. We are all “AAA” now – except for Ireland…