September 19th, 2008
02:15 PM GMT
HONG KONG, China - You know what? At the risk of sounding like true believer, I think the credit crisis may actually be coming to an end.
The wild fluctuations on Wall Street left many traders scratching their heads this past week.
Most people are saying it's far too early to call but look at it this way.
The credit crunch, as distinct from the U.S. economic slowdown, is happening largely because banks have been too scared to do their jobs ... lend to other each other. If they aren't doing that the flow of money circulating around the financial world is being cut off. We saw that happening this week.
The banks are afraid that the other party they are lending to may be riddled with the so-called "toxic holding," and be about to go under.
So what's the likely solution? Take away all that toxic stuff. Actually buy it from the banks. After that, the banks can get back to basics, safe in the knowledge that they aren't doing business with an institution stuffed full of the ticking time bombs of property-backed financial instruments. No wonder stocks of investment banks around the world are having record one-day rises.
So ... who's the loser? Well, I'm glad I'm not a U.S. taxpayer. The estimates of exactly how much toxic stuff there is vary from tens of billions to hundreds of billions, even trillions. All of which will be bought by the U.S. government (i.e., U.S. the taxpayer).
They've done it before. In the 1980s the U.S. government bailed out the savings and loans companies who had hopelessly - and in some cases fraudulently - mismanaged their operations. That cost the U.S. taxpayer about $120 billion. That's nothing compared with what this one could be. Did the US government have a choice? Unfortunately, we will never know. They clearly thought they did not.
And that leaves the banks getting a giant get-out-of-jail card, and the poor U.S. taxpayer cleaning up the mess. Again.
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