FALLING INFLATION with Rising Prices?
When you are told that inflation is falling, you would naturally expect prices to be falling . That ain’t necessarily so!
Many years ago, when I worked for a very large bank, I sent a team of people into town in order to find out whether the average British adult understood percentages. The answer was a resounding “No!”
MOST of the people we interviewed had NO IDEA about percentages!
Banks, supermarkets and even the government know very well that most people are either thick or at best borderline thick as far as simple arithmetic is concerned and they take full advantage.
Supermarkets “mix and match” their prices, so that you need to have the brain of a Stephen Hawking to decide whether it would be cheaper to buy three bags of crisps for the price of two or perhaps two at a different price with one free or maybe six bags with 10% extra. By the time you’ve made several purchases like this, you can leave a supermarket mentally exhausted.
Banks will be paying you interest at anything from 0 .01% p.a to 3.00% with maybe an introductory offer of three months with an additional 1.5%. Interest on credits is calculated from the day AFETR your deposit but debit interest on withdrawals is applied on the day of the debit. When a bank returns a wrongly applied charge, will it also re-credit the debit interest? If it does – then at what rate? You don’t know? You’re not alone.
The Government will throw statistics at you through the medium of television, delivered by double-first Oxbridge Economics graduates who have absolutely NO idea how to explain economics concepts – except to other economists. Percentage increases in GDP, percentages out of work, percentage decreases in the annual inflation rate. Percentage, percentages and even more percentages!
Which is better? a 10% discount and then VAT added or would you prefer the VAT to be added first and THEN take the 10% discount? If your energy bill tells you that the discount on your Gas is 5% and the discount on the Electricity is 5%, how many percent savings will you me making in total? What is 12% of £60?
Today, we have been told that annual inflation is on the decrease BUT we all know that prices are on the increase. How is this possible?
I am going to try and explain but in very simple terms.
Assume you bought a radio in January 2013 and you paid £95.70. If you then went to the same shop in January 2014 (a year later) and the price of the same radio had increased to £100, the price would have increased or INFLATED by £4.30. which is an increase of 4.5%.
Let’s now go back to February 2013 when the price of the same radio was £100 and assume one year later, in February 2014, the price increased yet again, this time to £104. That means that the radio would have increased in price or INFLATED by £4, which is 4.o%.
So, coming back to this year, between January and February 2014 (in one month), the radio’s price has INCREASED by £4 but at the same time, inflation has DECREASED from 4.5% to 4.0%!
Therefore, we have a rising price but simultaneously, we see falling inflation.
The media are already mumbling something about “falling food prices etc” having caused the present fall in inflation.
It is nothing of the sort : Yes, falling prices do contribute but the way that the calculations are made can be the major contributor to the figure because it is calculated in discontinuous annual slices. Today’s inflation figure depends on what the inflation figure was a year ago.
Having said all that, on this occasion, the CPI has actually decreased in one month
Mind you, as usual, whatever the basis of the inflation calculation, it will still not stop the politicians from claiming all the credit.
(Unless, of course, the inflation rate goes up too drastically, which is when those pesky “external factors out of our control” come into play!
Have you noticed that almost imperceptibly, the world has split along a 2008-weakened fault line. It is now a world of two halves. In 2008, governments rushed to the aid of their sick banks and five years later they’re still at their bedside. Like a bad parent who gives too much attention to one child, most of the politicians’ thoughts remain with the banks while we languish “Home Alone”.
The rest of us continue to feel like an organ donor being kept alive – but only just …….for no other reason than the benefit of the sick patient. At any moment there may be yet another call for a cash transplant but increasingly, it seems as if the patient’s needs are without end.
One thing we do know for sure is that the bond between politician and banker is now so profound that the politician would even sacrifice himself before he would even consider turning off the life support.
Government Debt: “We’re all in this together.”
Never mind all that “Debt as a percentage of GDP” nonsense. Here’s a picture of government debt on a simple picture, courtesy of ukpublicspending.co.uk.
It is OUT OF CONTROL.
All steep graphs are scary, no matter which way they’re pointing. Make no mistake, the above graph is so scary and the Chancellor is running out of options so fast, that we are about to reach a very significant and critical moment in Britain’s social and economic history.
Because Chancellor Gideon has well-and-truly painted himself into a corner and is greedy for cash, he will soon become like a schoolkid with his nose pressed up against the sweet-shop window. But what will he be looking at? Surely, there’s nothing left to plunder.
Currently, our savings are languishing in banks, gradually losing their value. Investment rates are lower than inflation and currently it seems as if the differential will continue to increase. THAT will erode our savings at an accelerated rate.
Dormant bank savings accounts have already been looted in order to fund one of the Chancellor’s rapidly growing array of “schemes” to stimulate the economy. On this occasion, the booty (up to £400 MILLION) will be destined for the Big Society Bank (remember?) which has now been rebranded BIG SOCIETY CAPITAL (BSC). Forty percent of BSC shares are owned by Barclays, HSBC, Lloyds Banking Group and RBS (They are preference shares which means that in the event of a collapse, the banks will have preference over other shareholders).
So what could the Chancellor and the banks be planning next? What happened in Cyprus ought to give us a clue.
As a country, we are not spending enough. One way to encourage us to spend would be to threaten our savings either by way of a levy (tax) or seizure.
You may be thinking “Yes, but surely, our savings are protected?” Yes, they are. The capital is protected but our cash is not protected against taxes.
Within four to five years, the government will have to find about £70 BILLION per year JUST in order to fund the interest payments on the money it owes. So where will it find the money?
It is there somewhere. Here’s a clue:
The richest 1% of our population, many of whom famously squirrel away their cash offshore, won’t be affected and neither will the large corporations – they pay tax when they want to plus they are also lucky enough to be able to decide how much to pay.
That leaves the ordinary Saver and Depositor.
The only thing that the government needs to decide is how to present the raid on our money so as to disguise what essentially will be a tax. There are several ways in which the exercise can be delivered.
For instance, a Cyprus-like levy. Simple and straightforward.
There may be some sort of government share-offer, designed to relieve us of our cash or even a mandatory Government Bond which those with a certain level of savings will be bound to purchase.
I would suspect that even Pension Funds are no longer safe.
But the really scary thing is that because this will be a concerted and choreographed international assault by governments and banks, there will be nowhere to run.
We are well and truly “All in this together”………well….most of us.
Those Teflon Banks.
If the economy was purring along, companies were forming and not going bust, banks were lending properly (not statistically) and the government didn’t regard any GDP growth above zero as an achievement, most of us would not have any problem with those banker salaries and bonuses.
However, it is not sunny, manufacturing is down and we have a government which appears to be indulging in “Government by Accounting” as an increasingly panicked Chancellor justifies Welfare Butchery (in a newly-acquired Estuary English accent), to an assembled band of Morrison’s workers.
Meanwhile, senior bankers continue to pay themselves more than many of the largest and most successful corporations (the ones that make and export stuff).
As Chancellor Gideon might say these days: “Something ain’t right, innit?”
Since the largely-forgotten catastrophe of 2008, the incomes of many bank directors have increased by up to 60%!
So what else has happened to the banking industry since those far-off days? Oh yes………..they’ve had bailouts totaling BILLIONS, they have mis-sold an array of financial products and the Bank of England has handed-over BILLIONS in Quantitative Easing for a variety of reasons, ranging from the perennial “rebuilding of Balance Sheets” to “Lending to Small and Medium businesses” to “Increased Mortgage Lending” ……(Notice I have placed those increasingly creative QE euphemisms in inverted commas!).
Admittedly, the effect of credit defaults on the banking system leading to those 2008 issues was devastating but the problems were self-inflicted and a direct result of the banks’ reckless leveraging with financial instruments, such as mortgage-backed securities and credit-default swaps. Virtual money……just like Quantitative Easing.
The final straw should have been the LIBOR-fixing scandal…but the Quantitative Easing meant that the banks could easily afford the fines and legal settlements and still maintain those eye-watering incomes.
That wouldn’t be so scandalous if it were not for the fact that LIBOR is used to determine interest rates on student loans, mortgages and many other lending vehicles — and was “adjusted” in whatever direction benefited the banks’ bottom lines and the resultant profits upon which many of those bonuses were based.
The question is – what do the banks have to do in order to stop being the government’s poster boys?
They certainly do not have the confidence of the ordinary investor, because , let’s face it, they don’t really NEED savers and depositors because they can either make cash by “adjusting” and then plundering the equities and bond markets or be given it by indulgent and clueless governments. Small businesses are wary of them because they (quite rightly) fear being ripped off.
There will be further scandals, more fraud, more “faux-outrage” from government Ministers but no meaningful legislation, culture change or reorganisation.
They are truly The Untouchables.
Equity Euphoria. Why?
The Markets are in the wrong place. For about two years, I have been suggesting that market sentiment bears absolutely no relation to what is really happening in the real economy.
Yesterday’s Markit manufacturing figures clearly show that Europe’s manufacturing sector is in a mess. At 12% , Eurozone unemployment is at an all time high with further austerity measures to follow.
In spite of all that and with increasing hand-wringing from economists, the markets are buoyant at near-record and record highs, the euro is showing only modest losses and for Bond investors it’s business as usual!
What is going on?
One thing that we can see from the manufacturing figures is that there is quite a marked divergence between Germany and the rest. Although manufacturing activity is shrinking to 5-6 month lows, the so-called “financial fragmentation” across the Eurozone has become increasingly obvious. The Eurozone does NOT have a uniform monetary policy which means that Italian and Spanish banks, for instance, pay much higher funding costs than Germany. That means that certain manufacturers are paying much more than German ones for their cash. On the face of it, that seems to be anti-competitive – but that unfortunately is just one of the many anomalies of the Eurozone – in fact of the entire European Union.
“The poorer you are, the more you pay for your heating fuel.”
This is the backdrop to a largely blinkered , almost “autistic” equities market where we appear to have reached the stage of self-amplification where , because of the abysmally low bank rates, EQUITIES is the only game in town. Self-amplifying? Yes – as more and more investors pile into stocks – mainly because they don’t want to lose out on a rally which they themselves are now fuelling.
The only cautionary note should be for investors who are only just coming into the market to ask themselves “What is the real likelihood of me making a profit?”
When will it stop? History shows us that rallies such as the current one can stop pretty suddenly!
There will come a point at which traders, especially those with short positions will decide “Enough!” – in spite of the fact that currently, there is no obvious level at which to climb out and possibly take a loss.
Once one jumps, the rest are sure to follow.
The Silence of the Auditors.
In the Good Old Days, when every day was sunny, there were only two TV channels and Bank Managers weren’t anonymous, every Debit used to have a Credit. Unfortunately, in Banking, this is no longer the case…..but is it only the bankers who were to blame for the hugely creative accounting which resulted in the 2008 banking meltdown?
While we’re all busy vilifying bankers for their greed an incompetence, there is still one group of professionals which has managed to remain silent since 2008.
Here is a table (by no means complete) which shows companies and the results of their 2008 Audit Reports.
|COMPANY||AUDITOR||AUDIT DATE||AUDIT RESULT||AUDIT FEE (Millions)|
|Abbey National||D &T||4.3.2008||Unqualiﬁed||£2.8|
|Bear Stearns||D &T||28.1.2008||Unqualiﬁed||$23.4|
An “Unqualified Audit” is also known as a complete audit. That’s an audit that has been performed and researched so thoroughly that the only possible remaining discrepancies stem from information that could not be obtained by the auditor.
An unqualified audit analyses both the internal systems of control, as well as all of the details in the organisation’s books.
Unfortunately, an audit has to rely on the information provided by the company and as there is often a “relationship” between senior bankers and senior auditors, the auditors have always assumed that the information that they are being given by their clients and chums is accurate and honest.
You can see from the table above that in 2008, every audit signed off every bank as “Unqualified”. A QUALIFIED audit would have meant that a “qualified” opinion would have been given. THAT would have outlined the auditor’s reservations concerning the organisation’s financial statements.
However, so complete was the conspiracy and fraudulent reporting by the banks, that experienced Audit Companies just sailed-by the morass of deceit and misreporting.
Note the fees in the right-hand column. They are in MILLIONS………..NOT that fees measured in so many zeros would EVER have any influence on the outcome of an audit!
So the FIRST question is VERY simple: Should the Bankers AND their Auditors be standing shoulder-to-shoulder in the dock?
The SECOND question is also very straightforward: Shouldn’t the Regulators be working with the Auditors and NOT with the Banks?
BTW, if you’re investing in Equities, do take the time to read J.K Galbraith’s (very short) book entitled “A Short History of Financial Euphoria”. Hopefully, it will help you to realise exactly where Markets are headed and on the day after the banks have climbed out, you won’t be one of the many unable to sell your investments.
Money printing – a simple question.
Today, the Head of Germany’s Bundesbank, Jens Weidmann, has asked a very simple but critical question about Quantitative Easing and its cousin, the Unlimited Bond Purchase:
“If a central bank can create unlimited money from nothing, how can it ensure that money remains sufficiently scarce to retain its value?”
Money is a commodity and was invented when someone did not have goods or skills to trade in return for a commodity he wanted. He was able to offer “money” which could be redeemed at a later date for something that the original “seller” wanted or needed.
However, if there is a too much of a commodity, its price goes down.
So, if there is too much money, its price WILL go down.
THAT is why Central Bankers are playing a very dangerous game.
The simple answer to Herr Weidmann’s question is that a Central Bank CANNOT ensure that by increasing the money supply, it can even begin to ensure that the money will retain its value.
What they’re doing is the equivalent of fixing a stalled car engine by painting the car…..again….and again….and again…..
New Banks for Old!
There is little doubt that a brand new Banking Act is a little overdue. However, instead of spending 5 years on inquiries, commissions, debate and law-writing, why don’t we just “rewind” and “tap-in” to some of the old banking legislation.
Banks HAVE become too big but only as a result of Retail, Institutional, Investment etc arms coming together to produce a Gordian Knot of “impossible to unpick” financial mystery.
This week’s favourite word is “firewall”. All we need is a buffer (or firewall) between a Retail bank and the Investment Bank. THAT’s an accounting exercise. Separate reporting , separate balance sheet, separate shares and separate management.
Once we see distinct organisations, we’ll know who we’re dealing with.
The Retail Bank’s job SHOULD BE to store and look after our money. The Investment Bank is a completely separate playground and is not proper banking at all. It is Stockbroking with additions such as crazy people who believe that they walk on water.
We need to return to the good old days when banks would finance themselves with equity and not with debt. Mind you, there’s absolutely nothing wrong with properly managed debt. In fact, without debt, there is no Capitalism.
Forget the “too big to fail” nonsense. The rationale should be simpler – a smaller institution is easier to control and inspect,with fewer nooks and crannies in which to hide “naughtiness”. Plus a small bank which “goes down”, is not going to bring an economy crashing in the same way as the banking behemoths of today can (and will).
Certainly, the British government should be looking at helping to create scores of small independent banks, rather than be held to ransom by a few huge ones.
Mind you, we once had a ready-made structure in place. The Building Societies. Unfortunately, most have now been consigned to the Skip of History. Shame.
The Building Societies would have provided a useful model because they were limited as to where they could invest depositors cash. They used to have a series of “caps” enshrined in legislation.
Today, a cap should be put on the Retail bank’s ability to invest in equities, plus a cap on liabilities as well as a strict limit on leverage.
Currently, Investment “banks” operate in a very highly leveraged way – with very little equity and masses of debt. By no stretch of the imagination is that “banking” as we used to know it. Plus the sheer volume of total bank debt places an unacceptable level of cost and stress on an economy. The current Eurozone crisis is a manifestation and perfect example of that phenomenon.
This is the very simple model we need to rediscover:
The Retail Bank holds deposits which belong to the consumers. The bank is empowered to lend that money to private individuals and small business.
The Investment Bank raises money for commerce through the Stock and Gilt markets.
Historically, there came a time when the banks weren’t happy with those simple arrangements and gradually, through the medium of legislation, government took the brakes off and so began an orgy of leveraging (borrowing) by the banks. Then they overleveraged (overborrowed) with the straw that broke the camel’s back, being the banks’ decision to leverage (borrow against) their sub-prime mortgage assets. Effectively, borrowing against something whose value collapsed because it was bound to collapse.
The surprising thing is that they’re still doing it. Why? Because, they know that there’s no risk to them because standing behind them are tired and bankrupt governments who have foolishly promised to bail them out.
Banks have now completed their journey from being keepers and stewards of community assets to scary insatiable monsters in constant pursuit of profit. Not for the community but for shareholders and executives.
Unfortunately, they are not very good at it – and yet, they are allowed to continue their rampage by uneducated and naive politicians who in truth, should have closed them all down four years ago.
However, there’s another problem. Western communities do NOT save as they used to. That means that there is never enough to lend to consumers from meagre bank deposits. (We spend more than we earn). Is there a solution?
Yes there is.
Retail banks could sell all the debt which private individuals needed. Those debts could be securitised through investment banks. (The concept of loans backed by securities is not a bad one, except when it is abused as it was in the United States.)
The down-side? Banks would never again be as profitable as they are today.
The Investment bank would concentrate on finding capital for companies and controlled speculative trading but without any government-guaranteed bailouts if things went wrong.
We need the traditional (Retail) bank because it is the foundation of an economy and where the entrepreneur goes for money so that he can become a capitalist .
The investment bank is where the capitalist goes to party, with money that has already been earned.
Time to turn back the clock?
HSBC – 2011 – $22billion.
Steve Slater (Reuters) 5:19 a.m. EST, February 27, 2012
HSBC Holdings, Europe’s biggest bank, predicted growth in Asia and other emerging markets would outweigh sluggish European economies this year as it posted a $21.9 billion profit for 2011, the best outturn by a western bank so far.
HSBC added, however, that success in emerging markets was becoming increasingly expensive, with costs rising 10 percent, or $3.9 billion – a third of that due to higher pay.
Banks across Europe have been posting billions of dollars of losses as the euro zone sovereign debt crisis has eroded the value of their government bond holdings and hit their trading operations, and as they strive to meet tough new rules aimed at preventing a repeat of the 2007-09 banking crisis.
HSBC has been relatively unscathed because it makes more than three quarters of its profits outside Europe and north America. It remained upbeat on Monday about prospects for emerging markets despite fears that some are overheating and could see an abrupt slowdown in growth this year.
“We remain comfortable with the emerging markets (outlook) and are confident that GDP growth in emerging markets will be positive and China will have a soft landing,” Chief Executive Stuart Gulliver told reporters on a conference call.
“We think there’s some recent buoyancy in the U.S., so the real issue of negative focus is how the euro zone plays about,” he added, predicting the euro zone economy would flatline this year, with “marked recessions” in some southern countries.
HSBC, with around 7,200 offices in 80 countries, said pretax profit rose 15 percent to $21.9 billion in 2011, just below analysts’ average forecast of $22.2 billion in a Reuters poll.
The figure fell short of the group’s record profit of $24.2 billion in 2007, but beat all other western banks that have reported so far for last year, including U.S. rival J.P.Morgan which made a $19 billion profit.
The world’s most profitable banks in recent years have been China’s ICBC , which made $32 billion in 2010, and China Construction Bank , which made $26.4 billion.
HSBC’s profits were boosted by a $3.9 billion accounting gain on the value of its debt. Stripping that out, underlying pretax profit fell 6 percent to $17.7 billion, due in part to rising wages in emerging markets and to restructuring costs.
CUTS AND BONUSES
Gulliver, who is reshaping HSBC to cut annual costs by $3.5 billion, lift profitability and sharpen its focus on Asia, said he would step up his plan this year.
He said HSBC would continue to pay higher wages in emerging markets, where there is strong competition for bankers among international and local rivals, adding higher revenue from those areas showed the investment was worthwhile.
At 0945 GMT, HSBC shares in London were down 1.5 percent at 566.1 pence, lagging a 0.7 percent decline in the UK’s benchmark FTSE 100 index . The shares have beaten the STOXX Europe 600 banking index by 15 percent over the past year.
“They’ve had a good run so I can’t get too enthusiastic, but they’re (HSBC) going in the right direction and it’s a good bet in a difficult sector,” said Brown Shipley fund manager John Smith, who holds HSBC shares in his portfolio.
HSBC said profits at its investment bank fell 24 percent to $7 billion, hurt as the euro zone debt crisis slowed capital markets activity in the second half of last year.
Loan impairment charges and other credit risk-related provisions, however, fell $1.9 billion to $12.1 billion.
The group said it paid out $4.2 billion in bonuses, down 2 percent on 2010. Banks are coming under intense pressure from politicians and the public to rein in pay awards because of the role of the sector in the world’s economic problems.
HSBC said it paid one of its bankers, whom it declined to name, 8 million pounds ($12.7 million) last year. Gulliver was the second-highest paid employee, getting 7.2 million pounds — including a 2.2 million bonus — down from 8.4 million in 2010 when he ran the investment bank.
($1 = 0.6306 British pounds)
(Additional reporting by Sarah White and Sudip Kar-Gupta; Writing by Mark Potter; Editing by David Holmes)
Copyright © 2012, Reuters
Send for the taxpayer!
In those long-gone antediluvian years before electronic calculators, personal computers, Subway sandwiches, alcopops , female managers and the morning-after pill, there were dusty institutions with mahogany desks, huge ledgers, pound notes and dour-looking men in shiny suits with fountain pens in the breast pocket.
Those venerable institutions were called Building Societies.
They took money from their saving members and lent it to their borrowing members who wished to purchase a home. That’s what they did – and they did it all with real money. Leveraging (borrowing), Gearing (borrowing) and Bonds (borrowing) had not been invented – and if they had, it wasn’t the sort of thing that they needed (or wanted) to know about. Life was simple plus there was the bonus of a typing pool full of straight-backed sexy young typists whose drumbeat was set by the old crone at the front!
Here’s how money was lent and how they managed to lend MORE than the 70% maximum that Banks are currently lending. In those days, banks weren’t even allowed to lend for house purchase (just washing machines and refrigerators).
The mortgage underwriter (in those days, they he was called the mortgage “assistant” ) would decide on whether the “basic” maximum loan that the Building Society was willing to lend was 70% or 75%. Simple! (In very extreme cases – for instance, for properties which were only standing because the woodworm were holding hands – the maximum could be as low as 65% of the valuation).
However, there were MANY occasions when a borrowing member would be granted a mortgage of 90 or even 95%.
“How did they manage that?” I hear you ask.
Let us say that the borrower wanted to buy a nice big five-bedroomed house for £10,000 but could only find a 10% deposit. That meant that the Building Society needed to lend him £9000 (90% of the valuation).
The valuer would recommend a basic loan of say 75% which was £7,500. If the Building Society wanted to lend the borrower the full £9000, it would lend – but only after arranging a form of insurance for the difference – in this example £1,500. In this way, the risky top-part of the mortgage was insured by the Building Society.
So, if the mortgage went wrong, the insurance company would stump up any shortfall if the Building Society needed to dispose of the property in a forced sale.
It used to be called the Insurance Guarantee or I.G.
Why all this rheumy-eyed nostalgia?
David Cameron has just announced a new scheme in which banks will be able to lend more than they are comfortable with – and presumably, borrowers will be able to borrow more than they are comfortable with.
The risky top-part of the mortgage will be insured but, in keeping with modern ways, it will be the taxpayer (who else)? and not an Insurance Guarantee company who will accept the risk.
( I wonder who is advising Cameron these days? I bet he has a couple of fountain pens in the breast pocket)
After three years, the scales have fallen from our eyes and finally, the light has flooded in. It has been long time coming but suddenly – an Epiphany!
The politicians, bankers, economists and even the Central Bank astrologers have absolutely NO IDEA as to how to deal with the gradually building waves of a massive economic crisis which is about to sweep the world. They’ve been gambling that random fiscal and economic measures would somehow provide a solution and make everything well again!
Money has been printed and distributed, bonds have been issued, promises have been made, false political visions have been shared and yet the self-amplifying problem continues to self-amplify.
Some of us finally realised that the Eurozone had run out of ideas when the German authorities temporarily banned “naked short selling” of Eurobonds. The action had absolutely NO effect. However, it did demonstrate that the politicians (who initially blamed the bankers for the pit of shit that they had help to create) were now turning a rheumy eye on everyone’s new bête noire – the SPECULATORS!
Bankers were greedy bastards with large bonuses but now it was the turn of the “casino-banking” speculators. Spit!
In any crisis, it is always a good idea to look for the root or initial cause. In the case of the Euro and the Eurozone it was an ill-conceived plan which , without tighter integration of fiscal policies between states was doomed to failure.
Make no mistake, the increasingly pathetic bleating of the French and Germans in respect of the looming Greek collapse and default has absolutely NOTHING to do with Greece.
It is all about their joint delusive attempt to prevent the inevitable collapse of their banks – which are holding billions in Greek IOUs. Nothing at all to do with Franco-German altruism.
As the French and Germans intertwine, hug each other and panic, their assault on the “speculators” and the markets , although understandable is also ironic. Why? Because eventually, the Western-European begging bowl will be waved at the markets and the “speculators” – in the vain hope that they will lend the impoverished Eurozone BILLIONS so that the sacred Euro cow can be reprieved.
Biting the hand that could feed you is never a good plan but currently, the markets are dealing with increasingly desperate politicians who have painted themselves into a Euro corner with absolutely NO way out.
Euro and Western economies in general are in debt – both in the public and private sectors. Several countries are bankrupt.
The only REAL solution is GROWTH which unfortunately is NOT achieved by insisting that the weakest economies attempt to restore growth through the unusual and meritless medium of The Austerity Plan.
Austerity gains you a lot of points with the rating agencies, makes it easier for you to borrow more but in the long-term, it is NOT a sustainable strategy – as we in the West are ALL about to discover. Overborrowing is what caused the problem in the first place.
The economic affliction is the mire of public and private sector debt and uncompetitiveness into which the weaker economies of southern Europe have sunk.
The cure should be to create an atmosphere for economic growth.
Unfortunately, the generally accepted (unproved but imposed) speculation is to force broken countries to try and balance their budgets and restore economic growth whilst slashing expenditure and demotivating taxpayers through increased unemployment, inflation and the resultant decimation of tax-revenues.
It will NOT be long before the inevitable wake-up call is heard!
Casino economics does not work.
Euphoria on Planet Bank!
Yesterday, the Governor of the Bank of England suggested that the banks have slowly returned to their bad habits – but why should that have happened?
Just over two years ago, senior bankers were standing around in draughty Treasury corridors willing to sacrifice anything for Government help in order to avoid the prospect of a banking meltdown.
Yet now, all seems well on Planet Bank.
J K Galbraith said “the financial memory is brief”. The fact that even now, those living in broken economies are piling into the stock markets and making speculative investments reinforces his view.
Investors fall into only two groups. Firstly, we have those who believe that markets will rise for ever – at least for as long as they are investing. Secondly, we have the more experienced group which thinks that it can ride the “ups” and climb out just before prices begin to dip. What they don’t seem to realise is that they are all as vulnerable as each other.
By rights, stock markets should have crashed by now. All that has held them at reasonably healthy levels is the abstract money that has been generated by central banks. No doubt the central banks imagine that they are doing their governments a favour but once again, they appear to have forgotten one immutable fact: investment euphoria (which on this occasion, they have helped to create) is always followed by a crash.
The trials and tribulations of 2008 have largely been long- forgotten. Speculators, traders and fund managers are riding the tiger once again with no obvious plan to dismount. They have returned to that state of false-euphoria which may well be generating “winnings” today but tomorrow will inevitably herald the collapse.
Those who really do manage to avoid the fall will do so more by luck than by judgement.
Regrettably, those who are making money and experiencing all that goes with it believe that they deserve their new-found riches. Their bosses tell them that they deserve their rewards – as if it is they who are creating the wealth. That belief spawns another very dangerous banker “syndrome”:
It is a super-assurance which carries an ominous presumption of invincibility. (Other sufferers are some hospial consultants and many politicians)
It is that belief – that blinkered uber-vanity which grips them in an ever-faster spinning vortex of blind euphoria.
When economist Roger Babson forecast the Crash of 1929, he was vilified because he was encroaching on the speculative madness which had gripped a nation. He had said that there would be a 60 to 80 point drop in the Dow and that many would lose their jobs and money and that there would be a depression. At the time, everyone was investing. The majority borrowed the money to invest because they believed that they could not lose.
Fast-forward to 1986 ; the time of leveraged buy-outs, merger and acquisition mania and Gekko-style corporate raids. Once again, euphoria came to rule the world. That year, J K Galbraith himself was asked by the New York Times to write a piece on this “new” phenomenon. He recognised the investment euphoria symptoms and predicted a stock market crash. The New York Times declined to publish but The Atlantic printed Galbraith’s article in early 1987.
Black Monday was on October 19th 1987.
Currently, we are in the midst of yet another one of those speculative episodes but this time it is mired in the economic fallout created by bailed-out bank debt. Plus we have that added “Chaos Theory” element provided by disruptions in the Middle East, various sovereign debt crises, commodity inflation and propped-up currencies…and yet…The Investment Euphoria is alive, smiling and in extremely good health.
Some may say that the investment banking fraternity has lost touch with harsh economic reality. The economy is outside their bubble.
The world’s indices are highish but still don’t seem to be in quite the right place. Speculators appear to be making money as stock markets rise and fall daily like a tart’s knickers.
There are some outsiders who have a sense of foreboding because bankers’ and politicians’ policies appear to be doing no more than postponing an inescapable economic destiny.
Investment bankers, fund managers and speculators count their profits and bonuses as speculative euphoria grips them. The downside is that whereas past amateur investors would pile into the equity markets out of greed, the modern version has taken to buying equities out of necessity.
The returns that private investors can obtain from the retail banks are so low that inflation is now eroding their money. One of the few places available to them nowadays which can produce a reasonable return is the Stock Exchange.
So how will the end-game pan-out?
That depends on the will of Central Banks such as the American Fed and the UK’s Bank of England. Their current status has deteriorated to that of the mildly interested but totally impotent but anxious observer. That suits the banks. They’re filling their pockets before the shutters come crashing down – and who can blame them?
Meanwhile, the central banks should prevent retail banks from investing OUR money in anything vaguely risky – i.e. allow only a very small percentage to be invested in equities.
If legislation decreed that Retail Banks should invest say 90% of their (our) money in Fixed interest or Gilts and a maximum of 10% in Equities, we could breathe a collective sigh of relief.
So what if the banks are pulling-in returns of 10%+ on their investments? We don’t care – all that we need is a return that beats inflation. Currently, the banks cannot even manage that – inspite of the super-human skills that they claim of their investment experts. (You know, the experts who are SO good that they have to be bribed to remain in place though the medium of the 7-figure bonus but can only leave the bank saver with a net-return of less that 1% p.a. on their savings)
Banking itself should be a very simple process.
The Retail Bank is a box into which we put money and the bank pays us a small return for the privilege. If we need a loan, and the bank believes that we ‘ll be able to pay it back, it lends us the money and we pay the bank a small return for the privilege.
But it doesn’t quite happen like that.
Instead, we have a monster which pays us a negligible amount for the use of our money and should we need the bank’s help, we are ripped-off with eye-watering repayments and outrageous interest rates. Plus, the banking “industry” is the only commercial activity which can sell you something (a loan) and then at any time in the future, increase the price.
Can you imagine buying a bunch of bananas from a greengrocer who then contacts you to say ” Have you finished those bananas yet? No? Well, the price has just gone up on the uneaten ones. In fact, we’re going to charge you more for the ones you’ve already eaten.”
The other self-pertetuated myth is that banks “create wealth”. They do not create wealth – they simply redistribute it.
However, the function of an Investment Bank – the one which does play with equities, is to help industry and commerce to create wealth. The Investment Bank is supposed to do that by raising money. Instead, it has evolved (some say “mutated”) into an organisation whose raison d’etre has become profit creation – for itself and its shareholders.
Bankers and politicians are confusing external wealth-creation (for others) with profit creation (for themselves).
Think about it. The banks don’t actually make anything -they merely redistribute it. Imagine an economy which consisted of nothing but banks – it would not work because no-one would be producing anything.
Banks cannot function without a steady money supply which is generated outside the banking system.
Mervyn King is right – until there is a major re-think of the banking system and it returns to carrying out those simple functions which augment an economy rather than leech funds away from it – we’re heading for another major fall.
Forget all that dramatic nonsense about “breaking up” the banks – it’s a straightforward accounting exercise with a “firewall” between the Investment and the Retail Bank.
What the banks need is a fundamental rethink of their function as well as another major reminder of their own fallibility.
I have a feeling that the lesson will manifest itself sooner than many “experts” believe.
“Global warming? It was the Bankers.”
“Lino” Clegg has firmly embedded himself in our psyche as the Spiro Agnew of British politics. Lino? Liberal In Name Only. It could have been worse – if they were still known as Whigs.
Meanwhile Vince Cable continues to carry the air of either Stadler OR Waldorf from the Muppet Show balcony. Vince’s face looks more and more tortured by the day – as if someone was trying to unblock his catheter by jumping on it.
It is increasingly apparent that in spite of the fact that the ConLib coalition is being promulgated as a “partnership”, it is an unequal union. They are not Joint Tenants but Tenants in Common and the Liberals are looking more and more like political ballast with 99% of the political tenancy being owned by Cameron and the Bullers.
Clegg’s obvious earnestness remains endearing, although one does have the feeling that an old-fashioned delivery bike may be a more appropriate mode of transport than a ministerial Jag. DC is using him as .a messenger/delivery boy and so far it looks as if “Lino” is quite happy “in the national interest”– his favourite phrase.
The “downside” is that DC has a price to pay for Lino Clegg’s innocuous presence. That price is the Business Secretary.
Ever since Vince Cable’s crack about Gordon Brown having mutated from Stalin to Mr Bean , he has worked very hard on his soundbites. In politics, there is nothing more powerful than a well-rehearsed ad-lib. Vince’s Ministerial Jag has given him more and more confidence to create increasingly colourful and outrageous metaphors – especially those directed at the soft target which is British banking.
He claims to be pr0-business but continues to take great delight in banker name-calling. It seems that it is OK for him to refer to bankers as “spivs and gamblers” but when he does that , he is only referring to a very small percentage of those who work within banking. It confrims the old-fashioned view that those who like to make money and flaunt it are ALWAYS bad people and figures of fun. That’s the British Way.
According to Old Man Cable, Capitalism is “killing competition”. Capitalism creates competition . Competition is only killed when capitalism mutates into monopoly – whether State monopoly or Private monopoly, the effect is the same. Although our banking system appears as a collection of separate businesses, the way that they are regulated and administered has just about removed any remnants of competition between them and the industry is now acting as a multi-headed monopoly.
Where is the competition between banks? They certainly used to compete but not any more. Because of the State’s intervention, they can now buy money at about 1% and sell it to the consumer for whatever they want. Worse still, they are now givenmoney by the State and then sell it to us for more-or-less what they please.
Not quite what Adam Smith had in mind and one feels that he would have been miffed by being quoted out-of-context by a Business Secretary who has a clearly perceived, self-inflicted “use-by” date.
Our collective appetite was whetted by the customary pre-speech leaks which suggested that the Business Secretary was to “attack the banks”. Why attack the banks for doing what comes naturally – something that few politicians understand – delivering profits for shareholders and rewarding those who delivered the profits?
Short-term profits are NOT damaging the economy. What has damaged most economies in the last two years has been the global con-trick of Goldman-Sachs spivs designing the Credit Derivative. Everything flowed and grew from that one fiscal spawn of Satan. The bankers were both victims and slack-jawed observers.
There has been a lot of criticism of Vince Cable delivering an “emotional” speech. The speech was not emotional per se – it was a contrived speech, designed for the front pages for the glorification of Vince Cable and to please his rapidly diminishing band of groupies.
The Business Secretary’s bleating about “restraint” in the payment of bonuses was pointless because all that he will achieve is to increase bankers’ salaries.
“I make no apology for attacking spivs and gamblers who did more harm to the British economy than Bob Crow could achieve in his wildest Trotskyite fantasies, while paying themselves outrageous bonuses underwritten by the taxpayer.”
That’s an easy one to sort-out, Vince. Keep Mervyn King’s trembling finger away from the printing-press “START” button because if you don’t watch him, he’ll do it again.
In actual fact, Vince Cable’s posturings were no more than a touch of “wind-and-wee”with a seasoning of badly conceived and amateurishly executed metaphors. All that he’s trying to do is to blackmail the banks into lending more at lower rates. Then he would be able to beat them up for “irresponsible lending” .
He also took the opportunity to call for the banks to be separated into Retail Banking (High Street) and Investment Banking (which isn’t really banking).
The Business Secretary has obviously forgotten that companies are created in order to deliver profits for the shareholders and the shareholders have the right to reward their executives however they wish. The shareholders are NOT social workers.
If your economic theory is more Trotsky rather than Keynes, you may be silly enough to say something such as: ” I am shining a harsh light into the murky world of corporate behaviour. Capitalism takes no prisoners and kills competition where it can, as Adam Smith explained over 200 years ago.”
NO you’re NOT and NO he didn’t. However, it has been noted that Vince’s ideas are 200 years old and second hand.
He continued: “I want to protect consumers and keep prices down and provide a level playing field for small business, so we must be vigilant right across the economy… Competition is central to my pro market, pro business, agenda.”
That rant is more bovine than Keynes.
He carried on to say that it is not easy for the Liberals to be Tory lackeys but added that “It’s necessary for our country that our parties work together at a time of financial crisis. It is an opportunity for the party to demonstrate that we have the political maturity to make difficult decisions and wield power, with principle.”
He has clearly demonstrated that he is attempting a brand new political trick – which is to be in Government (when DC is listening) and Opposition (when his Leftie Liberal chums are listening) . As Business Secretary, he should be seen to be a pro-business champion and leader. As a flabby very Left wing Liberal, he has to be seen to bash the banks and regurgitate Labour’s populist slogans. Every dawn sees him sounding more and more like Alistair Darling.
Was Vince Cable too high a price to pay for coalition and can he steer business and commerce through the rapidly approaching choppy waters of recovery within the context of a falling pound, collapsing market and high unemployment?
Where’s the New World Order?
A twisted fusion of capitalism and socialism is being forged in the white-hot heat of political panic.
No-one should complain because we are all being forced to run blindfold towards a world where profits are privatised and losses are nationalised. We cannot lose.
Competition within financial services will be a quaint throwback to the last century because both the US and UK governments have now demonstrated that if a company is big enough, it will have Federal and Treasury support. It is the smaller companies who will be allowed to go to the wall because it is only then that they can become financial fodder for their fat hungry cousins.
The new financial conglomerates now know that they cannot fail because the State will bail them out.
The lesson that has not been learned is that the sheer size of companies is what makes them difficult to govern. The only way to manage these fiscal behemoths is to impose rules that are so draconian that eventually, the spirit of capitalism will be totally expunged. The State will be calling all the shots.
There has been debate as to who is to blame for the current chaos. The bankers know very well what has happened but they mutter vague generalisations, citing worthless sub-prime bonds and a general lack of confidence.
There is no way that sub-prime (the greatest euphemism ever?) lending is to blame for the entire financial house of cards tumbling down. The real issue is that the banks DID NOT HAVE THE MONEY that they were lending. They have behaved like a banana republic which prints more money in order to pull itself out of the financial quicksand.
Yes, they have been using “pretend” money. Mugabe is doing it now, the Wiemar republic did it 70 years ago and the entire banking system is still doing it.
The banking system has relied on “electronic money” for years. It was not real money and they have probably known for years that they were sprinting towards meltdown. George Soros knew.
The regulators are not to blame because 90% of their efforts are designed to control the “little man”. The big picture eludes them . Last September, the FSA was still issuing statements as to the solidity of HBOS – that’s in spite of the “investigation” that it carried our six months previously on the possible manipulation of HBOS shares.
Now that the financial chaos has moved from “boil” to “simmer”, the Government must take the opportunity not only to take a close look at the regulatory regime but also think about a complete restructure of the financial services industry.
The FSA grew out of a need to control mis-selling in the Pensions and Life Assurance industry. That is still its main thrust.
In spite of the increasingly bureaucratic Pensions and Life industry, the bandits are still out there and always one step ahead – they can never be eradicated.
One hates to agree with Sarkozy but a new global authority must be formed that specifically carries out high-level audits and ensures the implementation of proper business controls within the banking sector.
However, we do have to accept that the ratcatcher can never catch all the rats.
Darling has the solution in his hands.
If you have read a good balance of the reporting and commentary on yesterday’s budget, you will have realised by now that this was a political budget. The Chancellor and his puppet-master know that their stewardship of the economy has a maximum of 12 months to run and then , as is the fashion nowadays, the lecture and non-exec circuits beckon. There is light at the end of the tunnel for some but unfortunately, not for all.
There is no point in raking through the coals of yesterday’s return to Old Labour and the 21st Century embrace of the Politics of Envy.
“Let’s do the rich!”and the great unwashed and the slack-jawed champagne Socialists will most likely follow. Trouble is that the great unwashed is fast becoming the great unemployed and Tony Blair’s Champagne Socialists (teachers, media people etc.) are now more Cava Sippers than being able to afford the real thing. Some have even moved to pink Zinfandel!
The Budget was delivered with all the panache and conviction of a tortoise that knew that it would never catch the Conservative hare. And did you see the Hammer-horror grin that Brown’s face morphed into when Darling sat back down into the wet patch.
Cigarettes – √. Booze – √. – Petrol – √.
Let’s make it look as if we are going to upset the rich – “It’s always good to piss on their strawberries”. -√.
Oh yes – Pensioners – √.
Did you notice that the Chancellor looked a bit uncomfortable talking in mere pounds and pence. After all, he is used to lots of noughts now. When the scale of Government’s borrowing was announced there was a definite shift in the Earth’s orbit as economists’ scrotums shrunk to a tenth of their size – at the speed of light. Some may remain dysfunctional for years to come. Like the banks.
This was a Budget by Numbers when what was needed was a masterpiece. The trouble is that before this Government is run out of town, Chancellor Darling will touch up an already impossibly bad economic picture with another Budget. What was that Chris Rea song? Oh yes – The Road to Hell.
You may be wondering why all seems to be well with the Banks – they should have all completed rehab by now and should be ready to score us some readies. Their Social Worker – otherwise known as the Treasury is telling us that they still need a bit of time to regain confidence. That is why they are currently being fed a “money substitute” through the medium of quantitative easing.
How is it that a few of the big banks have declared such surreally fat profits? Have you never wondered why or how they seem to have been rehabilitated so quickly? They are still cooking the books, ignoring the fact that they are still insolvent. The difference is that now they are doing it with this and other Governments’ connivance. To put it simply – it is a world-wide con trick. There is naughtiness afoot.
If we knew the real figures, we would panic. The fact is that for every pound or dollar that the Banks once had in their coffers, they lent or gave away at least 50. They tied the modern Gordian Knot not with rope but with worthless paper and they have fashioned what appears to be the most complicated paper chain ever conceived. Currently they all owe each other billions because they screwed each over, many times over. The screwer was also the screwee and vice versa.
This has been institutional fraud carried out by banks on other banks and the only reason why they are not all standing in the dock is that there isn’t enough dock available.
The other important factor is that instead of doing what Alexander the Great did and cutting through the knot, Governments still think that they can untie it . If they carry on their random attempts, it could take a generation.
The banks have the Governments by the balls.
That brings us neatly to a rather pathetic silver-haired Edinburgh Solicitor predicting that we are soon to experience a recovery with a growth rate of 3.5%. That statement really is not worth commenting upon because of the poor man’s past record – which is similar to Russell Grant’s. In fact…………………………..
There are billions of pounds stashed away in funds, in banks and in insurance companies. That money belongs to us and many of us will have to wait years before we can get our hands on it. I am referring, of course to Pensions. Personal pensions, group pensions, small company pensions… they come in a hundred delicious flavours.
There was a time when someone leaving a company – whether voluntarily or otherwise could take their accrued pension with them. Let us say that the Chancellor announced that for the next two years, anyone being made redundant or who wanted to stop working could have all of their accrued pension immediately. What effect would that have.
Firstly, we would have “spenders” in the economy. who could provide a massive buying stimulus to all retailers. The Government would save on benefits because many of these individuals would suddenly have “savings”.
Secondly the institutions holding the pensions would not have to be “persuaded” to part with the money because if they refused, they would be breaking the law. And if the didn’t have the money, then we would all know.
Thirdly, employers would think twice before sacking anyone if they knew that they would not-only have to fund their redundancy pay but that they would also have to hand over accrued pension benefits.
Too simple? The alternative is to keep feeding the banks with money that we do not have and that has a time limit which is not as far away as we seem to think.
Arrival of the “Suits”
Some commentators are saying that here in the United Kingdom, Margaret Thatcher’s policies and the 20 year-old deregulation of the markets have finally unravelled. It is not policies or rules that cause catastrophes – it is people. In this case it is the ineptitude of those running the banks and building societies.
Guess what? Apart from the four sacrificial lambs that were offered up a couple of weeks ago, the same senior executives are still running the banks – or should I say should be running the banks.That is, if they weren’t hiding behind the sofa with their hands over their ears.
Here’s a good Mastermind question: Who was the last bank CEO or Chairman to give a TV interview?
We have been regaled by the rather fatuous argument that the executives who are still in place are the ones who understand how the business works and if we trashed them then we would be in even more trouble.
That is nonsense.
I have worked for a Building Society, several large insurance companies and a large (the largest) American bank. The root cause of what has been happening in the last year-or-two is the total lack of senior technical and managerial talent within the industry. It is not a new phenomenon.
In the good old days, the lending of money to an individual was never a profession – it was more of a “trade” because it was simple. Consequently, the money-lending business (nowadays it is called “banking”) was run by ordinary honest folk who could gradually work their way to the top of their organisation – usually through a combination of hard graft and company loyalty.
The directors would make sure that they kept the bank or building society well within the liquidity rules, they would vary interest rates when instructed to do so by the Bank of England and they NEVER went bust because it was nigh on impossible to go bust. I recall just one occasion many years ago when the Chelsea Building Society was forced to revalue its assets but otherwise – no problems.
There were no executive bonuses because the word “profit” was not in their dictionary – but they would strive to make a small surplus. Likewise, there were no golf days, coventions or any other executive freebies.
Then laws were changed and the “suits” came.
Directors of lending institutions used to be a crustily venerable lot of old duffers who tended to be unqualified businessmen who strangely enough, were more entrepreneurial than the MBAs that are running the show these days. Typically, they were senior partners in accountancy companies, estate agencies or solicitors. They were men in their 50s and 60s who were REAL businessmen and who had created their own wealth.
That is where the seeds of destruction were planted – in the panelled boardrooms of provincial England. The Old met the New and were dazzled by the following: (perm any two from six) MBA, Oxford, Cambridge, Harvard, Degree and Insead.
The rheumy-eyed, pipe-smoking unqualified old directors were dazzled and seduced by the shiny new boys with MBAs and incomprehensible management jive talk. They all wanted one!
It was in 80s USA that the cult of the “corporate entrepreneur” had been born and transplanted rather uncomfortably into the gut of the UK’s financial industry.
The phrase CORPORATE ENTREPRENEUR is like “Police Intelligence”, ” Microsoft Works” and “Friendly Fire”. It is an Oxymoron.
A corporate entrepreneur is a man who has a salary, takes risks with other peoples’ money and is rewarded for his “bravery” through the medium of the exec-bonus.
A proper entrepreneur takes risks with his own hard-earned cash whereas the boys who run our banks are just overpaid bluffers with a shelf life and a permanent hard-on.
As a result of their corporate games, our Government is now forced to take a shortcut which is the reciprocal of what happened in China and the old USSR.
The Russians and Chinese flipped from state control to capitalism but we appear to be heading in the opposite direction. If the government takes on any more banks, it ought to be reported to the Competition Commission!
For the time being, the markets will bounce along, floating on occasional short-term waves of faux-euphoria.
We are whistling in the dark.
Soon we will all wake up and realise that if we are really seeking a new banking direction – it is the drivers and not the cars that have to be changed. The government is the short-term relief driver but new drivers need to be found from within the banking industry.
There are scores of very talented senior “solid citizen” gems within banking who are dependable and honest but who do not have the need to constantly spray testosterone and arrive in helicopters. We need service-driven bank managers and directors and not self-serving ego-driven scalp-hunting prima donnas with over-funded pensions.
These corporate hidden gems have all the knowledge and experience needed to reawaken the banking system from its torpor.
They are also the ones who know where some of the bodies are buried.
Methinks that it may be time to line up the current bank executives and perhaps introduce them to the concept of the exit interview.
(If you are not familiar with the phrase CORPORATE ENTREPRENEUR, please enter the phrase in Google, see the various Management Models, the smug mugshots………………and weep)
A dangerous game
Millions of words have been written on the subject of the latest corporate financial meltdown but no-one has yet explained in simple terms HOW it all happened.
Many years ago I was working in the Head Office of a small bank. One morning a little old man walked in and produced his savings book. He pushed it across to one of our cashiers and said “There’s three thousand in there. These are my savings.”
The cashier looked a bit nonplussed “Yes? Would you like to make a withdrawal?”
” No thanks,” he said, ” I’d like to see it.”
” What would you like to see?”
” I’d like to see my money – just to make sure that it’s OK”
Those were days of wide-eyed innocence and trust – the days of “My word is my bond” and days when honest toil was rewarded with a small Manila envelope containing cash. Real folding money.
Yesterday I was reminded of that little man. I remembered that he had one bike clip and a clapped-out cap pushed into the pocket of a grubby gabardine mac. He had complete trust in his bank because he knew that we were looking after his savings to the utmost of our ability.
That is why I asked one of the cashiers to quickly put £3000 in a metal box and make it ready for inspection.
What reminded me? A complete antithesis. It was a photograph of Dick Fuld, the Bruiser of Wall Street and Lehman Brothers’ boss.
That old man with the bike clip of 30 years ago had been brought up to see money as something real that you could see and touch. No doubt, when Dick Fuld joined Lehmans in 1969, his view of money had been the same.
Unfortunately, Fuld is not the only unqualified bruiser who has made it to the top of a financial institution through a combination of extreme personality, bluff and what is known as “corporate entrepreneurship”.
(Corporate entrepreneurs are only vaguely similar to proper entrepreneurs. They do take risks but with other people’s money. When they make a profit, they receive a bonus and when they make a loss…. they….er…. receive a bonus. It is believed that they invented the phrase “win-win”).
Unfortunately, their ego feeds their imagination and ultimately they self-delude into a state of what can only be described as corporo-infallibility. Their infallibility soon invites the ugly spectre of self-interest to install itself somewhere between the bonus fairy and the pension fund.
Today, Max Hastings referred to their “hubris”. He is quite right – but their hubris is only the outward expression of their perceived infallibility. In ancient Greece, hubris was regarded as the gravest of sins because it invariably led to the most severe retribution.
The cash that they play with is found on spread sheets and within complex computer systems. It has no colour, texture or real value. You cannot see it or buy anything with it. The game can only be played by those with a system that can plug itself into their system. It is a closed shop with transactions taking place in an electronic metal box. An XBOX with bonuses.
There will be many more financial collapses because Dick and his chums were not playing with real money.
Their perception of money is fundamentally flawed.
The billions that still pass through their grasping manicured hands is not real.
Dick Fuld, in common with many other financial institution leaders has been managing a myth. The myth of “assets” floating on a sea of money owed.
In any one year, all of the big investment houses complete deals and churn money to the value of well in excess of all the money in the world. So how does it work?
As an example, imagine that two banks “give” each other a cheque for £1billion and because they are banks, they promise not to bounce each others cheques – have they created wealth? Or have they created an illusion?
Imagine, over the years, that process being repeated thousands of times – then one of the banks collapses in spite of the fact that “on paper” it has “assets”.
Or, imagine someone walking away from a card game which was being played for matchsticks and admitting that he does not have the money to redeem his matchsticks. The other players then all admit that none of them has the hard cash to redeem their matchsticks.
All the banks went into the game believing that they would win. They saw the risk but imagined that the potential winnings outweighed the potential losses. Especially Dick “the Gorilla” Fuld.
Unfortunately it is now Game Over.
Great fun was had on the various stock exchanges around the world last week. Lots of yoyo investment activity. Shares were up and down like a bride’s nightie.
In the US, there was good news from banks such as JP Morgan and Wells Fargo but not so good from Lehman Brothers and Merrill Lynch. Citigroup was keeping its head down.
Fat Fannie Mae and Fulsome Freddie Mac are still sitting there in the corner, quivering and thinking “Feed me”. Freddie is thinking of raising capital by selling something like 10 billion dollars worth of new shares which will be a good scam if they can pull it off , bearing in mind that in 2008 they managed to lose their investors about three-quarters of their money.
But if they were allowed to go to the wall , property prices would disintegrate and the US housing market would grind to a shuddering halt. Nice.
There is even more fun and games over in the States : the US securities regulators are issuing subpoenas for Deutsche bank, Goldman Sachs and Merrill Lynch . They are looking at suspected manipulation of Lehman Brothers and Bear Stearns shares.
The banking sector has always been institutionally incompetent and now, to add to that wonderful endorsement, they are regarded as irresponsible, cynical and crooked. Gone are the days of the honest banker who had your interests at heart. There has been a comparatively recent proliferation of sharp-suited self-serving MBAs and other prats who have overcomplicated a venerable institution and turned it into a financial all-singing all-dancing circus.
Many of these people do not have a clue how to deal with the sort of crisis that they are now emeshed-in because they have only experienced the “ups”. Many will crash and burn. Sorry – Many will negatively optimise.
There appears to be no good reason why Sovereign funds or anyone else should rush to the aid of these discredited institutions unless there is a substantial change in their governance and competence.
The word on the streets is that the recovery period of the banking sector is going to take much longer than was generally believed. In fact, put two bankers in a studio, ask them about “the downturn” and you will get three opinions – all of them different.
In spite of the fact that they deal in numbers, it is remarkable how much guesswork and conjecture they rely on in their day-to-day activities.
The mechanics and decision-making behind last week’s announcement by the Bank of England to maintain the bank base rate at five percent demonstrate that institutions such as the Bank of England are not adding to the creation of an economy- they are merely myopic observers.
They are like the 1993 Grand National starter who was waving his flag at the horses when they false-started and were a hundred yards down the course.
The bank’s monetary policy committee consists of both bankers and proper economists. It was very interesting to note that one of the economists suggested that the base rate be raised by 25 basis points and the other wanted it lowered by the same amount.
Whether bank rates are raised by a quarter percent or lowered by quarter percent would make absolutely no difference to the economy because the Bank of England is lagging behind the economy.
The equation should be quite simple. Inflation is a consequence of rising energy and food prices which in turn are a function of too-rapid economic growth. We NEEDED a slow-down in economic growth because it was and still is unsustainable.
Interest rates cannot control economic growth. One day, central banks will realise this.
Nevertheless, through habit more than logic or science, inflation is still regarded as enemy No 1 – the Bogeyman.
The United Kingdom budget deficit in the quarter ending June 2008 was £24.4 billion. That is the biggest deficit since just after World War II. House prices are falling at the fastest rate since the Great Depression of the 1930s and United Kingdom share prices have fallen by 20 percent in the last 12 months.
The general feeling is that things will continue to head south to the end 2008 and possibly beyond. I reckon about 10 years beyond – with of course the occasional rally fired by bouts of illogical euphoria.
The whole scenario is not helped by the fact that currently the City wide boys have not only got themselves themselves into a right old state but have also managed to get themselves into a totally negative mindset.
Traditional thinking has it that in order to solve the problem, more money needs to be thrown at it . Imagine a small businessman on the verge of bankruptcy going to his bank and saying , ” OK, I screwed up. Let me have more money and I’ll see if I can sort it all out.”
Yet, that same small businessman is in the hands of an institution which dishes out business advice whilst losing millions. Takes your breath away! Plus that institution wants more money because it did not take its own advice!
The sad fact is that the banking system is run by incompetents who in turn are regulated by ineffectuals.
We have a financial system that was a Frankenstein. We now have a financial system which is an ailing Frankenstein.
There is only one solution and that is to dismantle the whole system and start again. Sounds extreme but all that it needs is lots of legislation or possibly the repealing of the legislation which turned Banks into a combination of Bank, Investment House, Building Society, Insurance Company and anything else to do with cash that you can think of.
The modern “name of the game” is called Client-bank Optimisation. That means that once you have a banking client, he is your prey and you can flog him anything! If you haven’t anything to sell him, invent something! That approach is a time-bomb which WILL eventually go off.
Having said all of that, there are still many in the city who are making money. Unfortunately, they are only making money for themselves and adding nothing to the general flow of the economy- apart, of course when they buy the next Aston Martin or penthouse pad.
Over the next few years, the dying bodies of financial institutions will finally float to the top.
There are some who at this moment are covering their losses and holes in the balance sheet thanks to either a fine Finance Director or CEO with a strong self-preservation instinct.
Their grey bloated bellies will finally be visible. They will be twitching in their death throes but as we have seen over the past few weeks, they will still be offering their grasping fat hands and asking for more money to be inserted by the taxpayer.
Time to stop.
Darling the Minder
If we agree that the Bank of England has acted as the banks’ pawnbroker, then the banks are the sad old hookers who were OK until one of their “tricks” ripped them off.
Understandably, they are still a bit nervous from the time that they were screwed when they weren’t looking but of course, it won’t ever happen again. They have a minder now. The Chancellor.
They are meeting him today. He is going to talk to them nicely and hopefully persuade them to lift their skirts and open their legs just a little bit.
Underneath all that bling, designer clothes and big cars, these hookers have a real heart of gold. Let’s be generous! As generous to them as they have been to us. They would like to go all they way but now feel that there is safety in numbers – they’ll stick together until all this blows over.
The only note of caution is that these professional ladies are dealing with a shiny new Chancellor. This ex-lawyer and Scottish councillor still looks a little nervous of doing it with these experienced old whores.
As it’s his first time, they will be gentle and let him think that he’s been wonderful.
What will they screw out of him ? Maybe a little corporation tax concession?
A normal minder would beat the crap out of them and send them back onto the streets.
Merv the Pawnbroker?
One commentator has called it spot-on : the Bank of England is acting as a high-class pawnbroker.
Imagine that you are a few quid short and no-one will lend to you. What is your last resort? It is the pawnbroker. There you can swap a few non-negotiable items for a bit of cash to tide you over until a bit more money comes your way. The only down-side is that it is a very expensive way to borrow ( or it should be!!).
The Banks have very high gambling debts and they need some quick “no questions asked” ready cash . Where should they go? They cannot ask other banks because their credit rating is not that good.
The “independent” Bank of England is a soft touch so they go and see Honest Mervyn the Bankers’ Friend – he will bung them a few quid. All that they have to do is pawn some near-useless investments in return for some guaranteed cash and………wait for it….they can have up to three years to redeem the investments that they have pawned – or perhaps they won’t bother. No doubt the Bank of England will grant them an extension when the time comes.
It would not be so bad if this only applied to one Bank. Rumour has it that most of them will need a slice of Merv’s generosity.
Will a gambler learn his lesson when he knows that he will be OK for as long as he has something to pawn? What is there to stop the banks from repeating their mistakes? After all, they are now in the unique position of generating lots of profit from their good investments (us) but if they screw up again (and screw up they will), they have the Bank of England to bail them out. If that is the case – why do they need expensive Chief Executives?
Keep a special eye on Bradford and Bingley, Alliance and Leicester and a bank that I shall only refer to as Carlos Fandango and his mates. Very soon, they will be hoovering-up a bank or two and they will not be paying top dollar.
Finally, does the Bank of England consider the banks’ Standard and Poor’s and Moody’s ratings? Or is it all done with a “nod and a wink” from the Chancellor. “I know these blokes, Merv. They’re OK for a few quid.”