A Simple Guide to the Banking Crisis

Proposition 1: The boom in the U.S. was funded almost totally by foreign money.

Proposition 2: Foreign investors preferred to put their money into investments that were perceived as having low risk.

Proposition 3: Today, after everything has gone bad, many of the counterparties on the other side of the toxic assets are foreign investors, directly or indirectly.

Proposition 4: It’s a lot harder for the Federal Reserve and Treasury to resolve a banking crisis where the main counterparties are not American.

Proposition 5: The fact that the counterparties are overseas means that out of the three options: bailout, bankruptcy, or nationalization—none are satisfactory.

The best actual marker of the progress of the financial crisis is not stock or real estate prices, but rather how well international cooperation holds up.

Sometime later this year we will have a massive global conference aimed at simultaneously resolving the banking crises in the major developed countries. The goal will be a political negotiation of the value of the toxic assets, and a clearing of the books.

If the conference succeeds, then it will be possible to fix the financial system relatively easily. But if it fails, then things get dicey.

via A Simple Guide to the Banking Crisis – BusinessWeek.

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