A report from the International Monetary fund, released today, said that “a protracted adjustment period” lies ahead in the wake of the financial problems created by the collapse of the U.S. subprime mortgage market. From the press statement:

… the GFSR [Global Financial Stablity Report] said the period ahead may still be difficult as bouts of turbulence are likely to recur and the adjustment process will take time. “Credit conditions may not normalize soon, and some of the practices that have developed in the structured credit markets will have to change,” it stated.

The full report is available here; an executive summary is available here. At the core of the analysis lies in what the IMF characterizes as a funding mismatch. From the executive summary:

The threat to financial stability increased as the uncertainty became manifest in the money markets that provide short-term financing (especially commercial paper markets). At the center of the turmoil is a funding mismatch whereby medium-term, illiquid, and hard-to value assets, such as structured credit securities, were being funded by very short-term money market securities—often asset-backed commercial paper.

I think another core issue here is the very securities themselves — the nature of many mortgage-backed securities and derivatives is opaque, meaning they can mask off-balance sheet and contingent liabilities. But it’s a game that can only go on for so long, as we’ve seen numerous times this year alone. How the financial markets address the problem of billions of dollars worth of such securities now serving as the “ghost in the financial machine” will determine where we go next. And I just don’t have the feeling yet that we’ve really seen so-called mark-to-market activity yet.