“Fundamental reassessment of the value of virtually every asset”
on November 8, 2008

Warsh.jpg“Our normal customers have no orders to place with us, and our credit department won’t let us sell to others who might want to buy”. The blog was given this plain-spoken assessment of current chemical market conditions by one of the majors yesterday.
Coincidentally, US Fed Governor Kevin Warsh was making one of his rare speeches, analysing today’s “unprecedented levels of volatility and dramatic financial market and economic distress”. He concluded that “we are witnessing a fundamental reassessment of the value of virtually every asset everywhere in the world”.
Warsh is one of the few central bankers who tried to warn of coming problems. He pointed out in April that “liquidity should not be mistaken for capital”. Now, he sees companies and investors being forced to reassess “seemingly benign risks – credit, liquidity, counterparty, and even sovereign risks”. As a result, credit controllers are refusing to allow sales to be made unless they are sure the invoice can be paid.


Warsh recognises that these strains are most apparent in housing markets. This is where the most reckless loans were made in recent years. But he argues that housing was just a symptom of the underlying problem, namely “inadequate market discipline, excessive reliance on credit ratings, and poor credit and liquidity risk-management practices”. As a result, “the business of banking is fundamentally changing”.
He therefore sees no “quick fix” for today’s problems. Instead, a new “financial architecture” needs to be developed, that will once again allow credit to flow and “trend economic growth” to resume. He suggests it will take time for markets to relearn how to “reward well-managed risk-taking, and punish imprudence”. This is because “confidence in markets cannot be demanded or forced. Nor can confidence be rushed.”
Warsh hopes that policymakers will help to “establish new rules of engagement that are clear in intent, consistent in application and reasonably predictable in effect”, and says this is “the central challenge facing our economy”. Financial institutions similarly need “to establish new business models”. Until these are in place, he concludes, credit problems will continue to be “a significant drag on economic growth”.

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