GO
Loading...

'Financial Botox' Hides Rotten Markets: Author

Money from central banks has acted like a botox shot for the world economy, covering up unresolved problems, Satyajit Das, the author of 'Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives', told CNBC Wednesday.

Botox, the drug commonly used to improve a person's appearance by removing wrinkles and other signs of aging has a temporary impact and can have significant side effects, Das warned.

"The world is currently taking the botox cure. A flood of money from central banks and governments – financial botox - has temporarily covered up unresolved and deep-seated problems .The surface is glossy and smooth, the interior decayed and rotten," he told CNBC.

The 2009 recovery was based on cheap money from the central banks; without it, things would have been far worse, according to Das.

"Without government support, it is highly probable that most economies would have been in serious recession," he said.

"Just as China practiced capitalism with Chinese characteristics, developed economies discovered socialism with Western characteristics," Das added.

He believes the world is simply kicking the can down the street. Capital injections, central banks' buying of toxic assets, government support for deposits and for debt issuers helped stabilize the financial system, while accounting rules were changes to defer write-downs, he said.

But despite these actions, "the global financial system remains fragile" said Das, who is worried about the state of the US housing market as a result.

"Recent stability in US house prices may be misleading, reflecting the effect of government incentives and low mortgage rates driven in part by the Fed's MBS purchases," he said.

Further Losses on Mortgages

The value of between 20 percent and 30 percent of properties is below the loans outstanding, home sales have remained "modest" with up to 30 percent of existing home sales being foreclosures and housing inventories remain high in historic terms, Das pointed out.

"With more adjustable rate mortgages resetting in 2010 and 2011, the risk of further losses on mortgages cannot be discounted unless economic conditions improve," he said.

Das is also worried about commercial real estate globally, pointing out the low rent Nomura is paying for its new offices in the City of London and is also worried about the health of the banking system.

- Watch the interview with Satyajit Das above.

"Banks are likely to remain capital-constrained in the near future, reducing availability of credit. Commercial and consumer loan volumes have declined, reflecting a lack of supply but also a lack of demand as companies and individuals reduce leverage," Das said.

Adding to his negative view of the world is his belief that government incentives on cars and trade credits will run out and have stolen future investment. Unemployment is now the key indicator to watch, Das warned.

"In many countries enforced reduction in working hours and taking paid or unpaid leave reduced the rise in unemployment levels significantly. Working hours and personal income have fallen," he said.

The 440 billion euros ($559 billion) European Financial Stability Facility (EFSF) is nothing more than a CDO or SIV and will lead to further stress on the euro, Das warned.

"In order to raise cash, the EFSF will need a triple-A rating but the structure of the fund raises significant doubts about its creditworthiness and funding," he said.

"This will create uncertainty about its support for financially-challenged euro-zone members with significant implications for markets," Das said.

"Resorting to discredited financial engineering highlights the inability to learn from history and the paucity of ideas and willingness to deal with the real issues," he added.

Contact Europe: Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More