As the economics team at HSBC recently pointed out, there has been a “catastrophic breakdown” of trust, and when that has happened in the past – the US in the 1930s, Japan in the 1990s – chucking extra money at the banks in the hope that they will start lending again proves ineffective.
It is not hard to see why trust has become such a rare commodity: Wall Street at the height of the securitization mania had, in effect, become London at the time of the South Sea Bubble crisis in 1720.
Vast quantities of funny paper were changing hands even though those involved in the deals had no idea of their true worth. Nor did they care.
Inevitably, now the bubble has burst and the huge Ponzi securitization scam has been exposed, there has been a reaction.
The securitization market is dead, there is less money sloshing round the system, banks are hoarding their cash.
