InterBank Trust Subsystem

The liquidity shutdown is due to banks not knowing both the exposure and the real value of assets such as mortgage backed securities on other bank's books.

In effect, Bank A. doesn't know if Bank B. can pay back a loan, thus A. won't lend to B. and interbank lending is at a standstill. This imperils credit flow through the entire economy.

This is why there is now a credit crisis.

To solve this, one need only establish a transparent market in the securities (such as mortgage backed securities) whose real value is currently unknown - and - to specify how many such securities are held by each bank.

This can be done by rebundling them into standard classes and requiring them to be reported transparently on a bank's balance sheets, and then setting up a transparent PUBLIC market in these securities.

When this is done the market will quickly determine the actual value of these securities and in so doing the actual value of every bank's assets will become known. This will enable banks to know who they can and can't lend to, at what rates, and on that basis banks can begin lending to other banks freely again.

When this happens a few banks will fail, most will take write downs but every bank's financial position will become clear as investors will buy and sell these assets at their actual market values. There is more than enough capital (most sitting on the sidelines now) willing to invest in mortgage backed securities at their actual market prices. Most mortgage backed securities are not worthless, just worth somewhat less than their original value. After all most are not in default and the houses that back them all still exist and have value, a value that could eventually increase again if the situation is proactively and intelligently managed.

The InterBank Trust Subsystem would get credit flowing through the entire economy again and the current crisis would be resolved. Very obviously, this simple solution will not be implemented because there is a tremendous degree of institutional dishonesty and concommitant institutional secrecy.