I am up ready to listen to the Presidential debate, so thought I would share my letter to the Guardian today. But first, may I beg readers’ tolerance for mixing too many metaphors…
Dear Sir, Robert Reich calls for “new regulations related to disclosure” (The £700bn question, September 26). This suggestion proposes closing the door fully 30 years after the herd of Wall Street bulls has escaped. And it would do no good, for the real point is this: Wall Street and the City – ie the whole of the finance sector – cannot disclose what it does not know. And regulators – central bankers and politicians – cannot regulate the unknown.
We are in this mess because regulators allowed investment banks to use sound financial products – solid bricks-and-mortar mortgages, credit-card loans and loans to the productive sector – to create a tottering tower of artificial products, far removed from the reliable income streams generated by those good people and businesses paying their mortgages, loans and credit-card bills. This tower of financial products, now teetering above a shaky housing market, is known as “unfunded”. A straightforward mortgage is funded – at least until default. These fancy liabilities are not – yet our regulators, including the Bank of England, tolerated their creation.
At the end of 2007, the US Federal Reserve estimated financial sector debt at 110% of US GDP, or $15.4tn. It was 63% just 10 years ago. The trouble is we can’t be sure of this number, as much of this debt, or these liabilities, are either fraudulently hidden, or else buried in incomprehensibly complex computer models. That is why there is no trust in this business.
US regulators and politicians are now trying to insert a brick of $700bn into a tottering tower of at least $15.4tn. A Sisyphean task if ever there was one.