“Addressing procyclicality in the financial system is an essential component of strengthening the macroprudential orientation of regulatory and supervisory frameworks.” [and so there is a need to] “mitigate mechanisms that amplify procyclicality in both good and bad times”. That is part of what the Financial Stability Forum recommends in their report of 2 April 2009. http://www.fsforum.org/press/pr_090402a.pdf

Indeed it sounds a so very impressive and technically solid conclusion? Yet it completely ignores that the prime reason why we find ourselves in the current predicament has much less to do with prociclicality in good times or bad times and much more with some good old fashioned plain vanilla type plain bad investment judgments. What had the world to do, whether in good or bad times, investing in securities collateralized by awfully bad awarded mortgages to the subprime sector in the USA? Would we be so deep in this mess had not the credit rating agencies awarded AAA to such securities? Of course not!

It is a shame that the Financial Stability Forum does not have in it to openly accept the fact that the whole risk based minimum capital requirements for banks idea imposed by Basel is fundamentally flawed, in so many ways. They only accept it in a veiled way when they recommend a “supplementary non-risk based measure to contain bank leverage”.

The lack of forthrightness serves no purpose and can only supply further confusion. Let me here just spell out two of the arguments I have been making.

The current minimum capital requirements are based on requiring less capital for investments that are perceived as being of lower risk while in fact, in a cumulative way, what most signifies a truly systemic risk for the world, lies exclusively in the realms of the investments that are perceived and sold as being of a low risk. In other words systemically the world at large does never enter B- land it goes like a herd to where it is told the AAAs live. The problem was not so much that the world went to play at the casino, the real problem was that the tables were rigged, one way or another.

In the current minimum capital requirements dictated by Basel a loan by a bank to a corporation rated AAA by a human fallible credit rating agencies requires only $1.60 for each $100 lent, equivalent to 62.5 to 1 leverage and this obviously has much more to do with regulators losing their marbles than with times being good or bad.

This financial and economic crisis will cause more misery in the world than most if not perhaps all wars. Do you really not think the world merits the truth and nothing but the truth?

The most deep seated problems and the one ones that will be most difficult to solve exist in the hundreds of general funds, pension funds, enterprise funds and health care plans which are all flirting with bankruptcy.

Then there is the market for state and local debt which is hovering at around $3 trillion meaning that that borrowing costs will inch up by about 50 basis points for all but the most well protected jurisdictions, and this coming spring will be prove crucial because it’s a time when many states and localities rewrite their budgets.

Reduced revenues caused by a slowing economy, along with increased investor and analyst wariness will mostly likely combine to reduce debt ratings which will further increase the cost of borrowing, which in turn will further strain revenues and although tax hikes might help they could come at the cost of further depressing business activity.

Some supposed pundits that should know better are now propagating the idea that some inflation might well be good for the economy which is hard to understand given that almost everyone agrees that spiraling house prices were what triggered the present crisis.

There is however an upside to the collapse in house prices.

The reason that house prices spiraled was that banks lent money to people whose incomes could not possibly support the loans and the continuing decline in house prices should lead to a saner relationship between the borrowers’ income and their ability to borrow.

The threat of rampant inflation does however loom on the horizon!

Long-term interest rates, led by the benchmark 30-year fixed mortgage, inched up last week which is exactly what you’d expect when lenders believe that that the dollars that they’ll be getting back will have much less purchasing power than the ones that they are lending.

Neither deregulation or reregulation is going to end the crisis and only market forces can do it, but the necessary rebalancing will be painful and not swift!

Home Loan Help is one of a small network of sites that is offering help to people that are in or fear financial problems so maybe check it out.