Reasons to be cheerful amid financial apocalypse

A. MacAulay

After trying with all his might about five years ago to get rid of the Deutsche Bank's High Street branches in order to concentrate on Investment, Josef Ackermann the sinuous, Swiss bank-boss, has rediscovered the virtues of private customers and aquired in the Postbank, the largest German private customer Bank, a way back to the High Street and normal life and away from Investment Banking.

I think we will now see a stampede to find middle class customers with middle class concerns and needs, which is where Banks ought to be.

Also, why is there such a deathly silence about Basel II from financial journalists? It seems that strictures on equity were ignored by Banks but applied to businesses. To everyone's detriment!

And Rating? Apparently these people don't have the brains to be ashamed.

K.Vijayakumar

Greed-driven play with mortgage-backed securities without caring to test the toxicity of these derivatives has brought about the inevitable result. There was no "invisible hand" to guide the wealth-creators-in-a-hurry in their pursuit of what they thought was their self-interest. A system which despised "more government" is now asking for more and more from it. These are indeed strange times!

mike turner

THis interesting and sensible, but no-one has really looked at the cause which is the irresponsible "financial instruments" which were packaged and sold to make fictional bonuses. Why did the auditors sign off ridiculous balance sheet values ?, why didn't the SEC fulfill its mission if protecting investors ? Someone should sue the big accounting firms.

Ian C

Those who say that one thing caused this have not been nor are taking part in the real world.

The cause was a combination, a perfect storm of various forces coming together. And there were plenty of forecasters who saw it on the map and many more who beleived it would happen but could not understand why it had not happened when forecast. Most ignored the possibility.

Complex instruments, very low interest rates arising from a wall of cheap capital, deflation in Japan in the 90's, 9/11 and the 2001 American recession, the rapid expansion of China and India, the opportunity to get rich, uncontrolled greed combined with politicians who saw an opportunity to keep interest rates lower than they should have been. And stupid ordinary people believing that because a loan was made available to them they should take it, ALL played a vital part in where we are today.

A major element in the States was, according to some, the ridiculaous accounting rulesd brought in after Enron. These apparently meant that all 'complex instruments' had to be valued to market prices - even when there was no market. If you think about it that has a certain logic. Not everyone loan on all banks books are in default but the rules made Lehman and others value them as it they were, so some had to call in the receivers. Not too clever of the regulators if that is so.

The good news is that in today's world 'stuff' happens that much quicker. The world economy is very open and many times the number of active participants are part of it compared to the 1930's. I would hazard that this will pass like a tornado - with alot of devastation on its wake but the worst will be over quite quickly.

Herbert Thornton

While we should all hope that Martin Vander Weyer is right, there is another voice that seems, to me, to analyse the situation more deeply. I think it deserves close attention. It is that of Conrad (Lord) Black, writing in this weekend's National Post (q.v.).

He identifies several areas of concern, but one of particular interest was where he wrote - "....., the United States and other countries have fallen too far into the fool’s paradise of the service economy. The U.S. GDP of $13-trillion is about half composed of worthless and non-productive effort, which yet engages the efforts of a large number of very skilled people....."

It is all very well for the U.S. to create $700 billion to keep what amounts to its service economy afloat, but when the service economy (and especially the financial segment of it) itself caused the problem in the first place, is bailing out the most parasitic part of the economy the most rational policy, for either the U.S. or Britain?

Mike Colonial

Martin vander Weyer is saying what at least two Harvard economics professors are saying - the froth, nonsense and contrived banking "products" which have mushroomed over the last few years will now disappear, halving this sector to below 20% of GDP. Look out for more busking bankers in the underground than in taxis above it.

But subprime was Phase 1. Phase 2 is what will result from the sudden turning off of the flow of money from the housing boom. For years it washed through the whole economy. It is now dissipating or will land up in the hands of the super rich, the sovereign funds, the oil exporters and the like. That will be painful. Or inflationary, surely, if new money is printed to replace what the recession destroys?

Herbert Thornton

The Harvard Professors' forecast of the financial services sector shrinking to below 20% of GDP is encouraging, but I don't entirely follow Mike's argument that money will somehow be diverted from housing, and flow instead into the hands of sovereign funds, the super rich, and oil exporters. Quite likely more money will flow to oil exporters because if new money is created - and the US$700 trillion bailout appears to involve exactly that - it will be inflationary. The dollar will be worth less, so a dollar will buy less oil, unless the oil price falls.

The biggest questions, it seems to me, are whether the $700 trillion bailout is going to be enough - and how much is too much. Governments can always create more money, as Robert Mugabe has demonstrated.

Severe pain in the financial sector combined with moderate inflation are perhaps the best we can hope for. At the same time though, I wonder whether pain in the financial sector necessarily includes things like some peoples' savings and pension funds being vaporised and others being much diminished.....

Mike Colonial

Re Herbert Thornton's point, I think the slowdown in the housing market it the least appreciated of out current woes. Certainly sub prime, and what it will do to financial structures, is going to be serious, to what extent we do not know. But the real cancer is going to be the radical cut backs in and around the housing industry.

For years there has been a fire hose sized gusher of new money provided by the banks for house building, housing at rising prices, home improvement, second homes and for other non housing related consumer spending. Those funds wash through the entire economy stimulating every sphere of spending, and land up in the hands of those who save - the super rich, the sovereign funds, the oil exporters, strong corporates and prudent Asian governments.

And the ramifications? Asian countries refusing to take more dollars? The US response to an alternative non $ oil market? US $ inflation to lessen their debt burden? Depression in the West? Gold? One would expect more reasoned opinions being offered in the media. But then, having asked the head of one of the big five US banks some years ago whether he was not worried about the point at which housing expenditure ended, and being told "No problem", whose opinion can one trust!

Herbert Thornton

I'm still not convinced that Mike is looking at the situation from the complete point of view, but I think his questions about ramifications are spot on. The ramification that I see is considerable inflation. He's also right that the banks have provided a torrent of money for housing and consumer spending. Others have naturally profited from this. But does follow that the actual money has all ended up in the hands he lists? It seems to me that -

1.the Banks have lent a great deal of money to people to buy houses & that the banks can't recover their loans because the borrowers can't pay and the houses can't be sold for enough to enable the banks to break even;

2. the banks have also lent a great deal of money to people to buy consumer goods - & that the banks can't recover much of that either; AND

3. The 'financial sector' has devised elaborate schemes, dressed up as "investments" to spread these risks around, while creaming off money for these so-called "services". Despite the poor risks involved, a great many people and organisations, including the super-rich, who have all been looking for something to invest their money in - have fallen for this. Now the big question is - can they get all their money back - or indeed any of it? I see a bitter scramble, with the cleverest trying to grab the most from the wreck - and from the multi-billion dollar bailout from the U.S. government..

I mentioned, in my first post, Conrad Black's article in the National Post. I think the whole article is well worth reading. -
http://network.nationalpost.com/np/blogs/fullcomment/archive/2008/09/20/conrad-black-lessons-to-learn-from-wall-street-s-week-of-no-return.aspx