Against the tide: History is no guide to financial institutions’ woes

Financial institutions’ woes are not at an end. Non-deposit institutions still have losses to book and the whole credit creation model is broken. So a quick and easy upturn from the credit crisis is not to be expected.

The rally in equities and other risk assets is based on the view that the market can see the end of the tunnel for losses in the financial sector. And so, as in past recessions, as confidence returns, so will the strength of the real economy. That’s how the argument goes.

But history is no guide this time. First, markets have failed to recognize the big impact that losses among financial intermediaries will have on credit creation.

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