In London I picked up a copy of the Chatham House’s journal, “International Affairs,” perhaps the most prestigious European journal in this sphere. In one article the author pointed out that the financial crisis was rooted in the basic fact that consumers were no longer able to borrow against their homes to keep their consumption going, while banks were unable to borrow because they ran out of sufficient reserves. What the banks faced was no longer being able to borrow short term to maintain their portfolios of long term investments, i.e. mortgages.

I agree with both of the author’s conclusions but would add that the banks ran out of reserves because their holdings of securitized debt, mortgage based assets, collateralized debt and derivatives built on these were savagely devalued by valuators using a false assumption, the debts would not be repaid. Well we all know now that by the end of 2008 some 97% of all bank loans were being paid on time. The banks’ securitized debt assets were devalued way beyond any reasonable amount. Enter the credit freeze.

Those devaluing the securitized debt claimed that they were marking these assets to the market. If that were true then the market is an ass. But no, they were not “marking to the market” but rather to the models they created to value the assets. The models were in turn based on the property market, not on defaults. A huge mistake that caused the whole show to collapse.

Of course this could have been avoided if the market for the securitized debt had been transparent. But this was not the case so the panic went wild. The author said he would expect the outcome to be tighter government control over the markets for securitized debt, derivatives, and other “structured” investments, the same thing I have called for.

Meanwhile, I also read an item that the Church of England is urging the UK government to not try to control fees, costs and compensation for those trading in “over the counter” investments, read securitized debt, but rather to make these markets, “more transparent.” Maybe the Church is reading my blogs.