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.