“Move over, Darling. Please!”
Banks are currently reducing their assets and hoarding cash because of liquidity requirements. Put in simple terms, that means that the magic conjured-up money – the so-called Quantitative Easing is making it in through the banks’ back doors but the front doors remain only slightly ajar.
No amount of media-blackmail or Government arm-twisting is going to persuade the banks to start lending to commerce or to the private sector in reasonable volumes or at reasonable rates. The banks are lending but at nowhere near the volumes needed by the economy. When they do lend, they apply wall-to-wall fees and a starting interest rate of the order of 6% over Base Rate. So, if you factor-in their fees, the actual percentage rate is ridiculously high compared to what little the BANKS are paying for the money and compared to the average company’s profit margin.
Very often finance is over-complicated. For instance, if you are a manufacturer and you have a bank overdraft on which you are paying 10% per year, you need a pretty hefty profit margin in order to make any profit after you have paid your bank charges. Simple.
Currently, margins are so tight that the banks may as well be in a different economy and on another planet because the sums just do not add up. The banks are doing their own thing, apparently with absolutely no reference to what is happening in commerce – especially where interest rates and current commercial margins are concerned.
There are those who seem to think that the current Bank of England Money Sale (Quantitative Easing) is not working. “We can’t tell yet” is a current often-recited bankers’ Mantra. The double uncertainties of whether QE is working and more importantly, whether the UK will ever be able to repay its currently vast borrowings without further damaging the economy has caused the pound sterling to fall in value. It has begun its short journey South and will be closely followed by the dollar.
Mervyn King, the Governor of the Bank of England wants to add another £25 billion to the Quantitative Easing pot. He is currently in a minority of ONE. The dissent reminds us once again that Economics is largely a matter of opinion, guesswork and misjudgement.
The Chancellor, Alistair Darling still has an occasional bleat about bankers’ bonuses. That is all purely cosmetic. Bankers’ bonuses are trivial in comparison to the current needs of manufacturing and commerce. In fact, the whole subject of bankers’ bonuses is taking-up a very disproportionate amount of not-only our media space but also of the Chancellor’s and the Prime Minister’s collective energies. It is a red-herring. This morning, Alistair Darling has again been banging-on about “clawback” and banks holding onto bonuses for three years. It’s all ill-conceived rubbish.
The fact is that the Government has absolutely NO RIGHT to tell any privately-owned company what it should be paying any of its employees. That is up to the owners of the company – the shareholders. However, where the Government is a major shareholder in a company, e.g. RBS, only then is it at liberty to impose its views.
The banking issues will not be solved until there is a dislocation between High Street Banking and Investment Banking.
This morning’s hare-brained scheme was to ask companies to declare their TOP 20 earners’ incomes. That should work-well for many Hedge Funds! Some only have 5-10 employees. We’ll know what their secretaries and cleaners are earning which should be useful!!
The Banker Bonus issue is a red herring which the Treasury is using more and more to distract us from the fact that they not-only made a mess of managing the economy prior to September 2008 but it now looks increasingly likely that the “cure” that has been applied through the medium of Quantitative Easing only has a 50-50 chance of working.
The real worry, however is that Quantitative Easing was the last throw of the dice – and don’t be fooled by the near-miraculous “recovery” of the Stock Markets. Those Investment Bankers are now gambling with pretend QE money. The end-game will be fascinating.