The sub-prime mortgage crisis which erupted in the US back in 2007 has now besieged the global financial system, with no definite end in sight. During the April 2009 presentation at the Lowy Institute, the Asian Development Bank’s economists highlighted that this recession's timing is unprecedented - hitting both developed and developing economics. This situation has made it harder to stage a recovery.

In order to break the current economic vicious spiral, Hernando de Soto (Institute for Liberty and Democracy, Peru) advocates the urgent need to ascertain and come clean about the extent of the remaining toxic assets (financial derivatives). He also warned of the impending social unrest and the loss of the developing economies' confidence in the global financial system. This could happen if the US doesn't apply its economic policy prescriptions for crisis-wracked developing economics to its own institutions.

The main source of the current financial woe is the uncertainty surrounding the toxic assets. It has been two years since the sub-prime mortgage crisis, yet these toxic assets still exist somewhere in the financial institutions' balance sheets. The same questions still remain, "How much (toxic assets) still exist, and who owns them?”. This unknown has allowed fears to flow from Wall Street to Main Street and crippled the real economy.

Meantime, Secretary Geithner has set aside 1 trillion dollars to purchase these toxic assets. From the start of the crisis, 60 trillion dollars of real losses have already occurred in relation to the assets in question. The market's irrational behaviour is clearly due to the lack of independent assessment of these toxic assets. Governments and the financial institutions needs to face up to the truth without further delay, collect the data and clearly identify the bad assets’ owners and ascertain their true value.

Some institutions may collapse as a result of these tests but those who have brought us to this state of affairs will have to face up to their deeds.

There will be grave challenges for global financial systems if developed economies like the US do not take the bitter pill and introduce stronger corporate governance, as advocated by the IMF during the 1997 Asian Financial Crisis. These challenges include:

a) Developing economics increased suspicion of the global financial model and its real benefits

During the recent G20 London Summit, UK Prime Minister Gordon Brown declared that “the Washington Consensus is over”. Developing economics that have suspected all along that they were not getting a fair deal from currently financial model will conclude that they are “getting more of the same”. The US Treasury and the Federal Reserve have to take this opportunity to deliver on promises of stricter governance and higher regulatory standards to control financial institutions.

b) Greater risk of social unrest after repeated and excessive publicly funded bailouts

Billions of dollars in public funding have been spent to prop up these ailing institutions and companies in the name of national economic stability ("Too large to fail"). At the same time, there are homeless, unemployed and impoverished people out on the streets who are questioning the lack of support for their situation. If these corporate bailouts do not work and indirectly keep those responsible for this crisis in their positions, many poor and disfranchised people will have had their legitimate needs unmet, and very possibly be a source of social unrest as they protest against the injustice and ineffectualness of these corporate bailouts.

In this global financial crisis, we have to stop fear in its tracks and recognise the losses before we can move on to the path of socio-economic stability and recovery.