Economics Views : 28 July
July 28, 2010
Advertising a bank’s service
is the alternative to improving it.
Will Rogers; if there were less of the one, there might be more of the other; applicable also to stress tests!
Brussels has always played mind games.
As a PR exercise, Europe’s “stress tests” did what they were designed to do. They gave the banks a (generally) clean bill of health. And they boosted stock market valuations. Excellent, said the Brussels’ spinners; the fundamentals are deemed to be satisfactory and sentiment to be improving!
Its priority isn’t the reality of banking security, . . .
Whether the rest of us should consequently sleep more easily in our beds is another matter. What would the tests have found if they’d been conducted a couple of years ago, immediately prior to the crisis? Would they have revealed the banks vulnerabilities? Or would they have missed them?
. . . but the perception of it.
That’s the crucial test. That’s what we need to know. And that’s what we’ve not been told. Why not? Because, very probably, the tests would have failed to spot the banks’ weaknesses!
Excessive regulation has curtailed credit.
The reality is that, in a liquidity squeeze, all financial operators become vulnerable. If banks were required to have reserves large enough to withstand moderately severe crises, they’d not be able to lend to their customers. They’d cease to be banks.
Banks are no longer fit for purpose.
That’s what’s happened in the last couple of years. Politicians and regulators, belatedly slamming shut the stable door, have created the worst of all worlds. A banking community that’s over-paid, but under-worked; staffed by asbo-bearing hooligans who’re expensive to police, but contribute nothing to society.
Even the politicians are noticing.
Vince Cable has noticed the anomaly. He drew attention to it last week, but didn’t ascribe it to the regulatory environment. And what’s his solution? To create more competition? To break up and sell off the delinquent Scottish banks (the ones that should never have been saved)?
But their cures, as usual, are worse than the disease!
No. He proposes linking the amounts bankers lend to the bonuses they’re paid! Is it any surprise that electoral support for the LibDems is plunging? His suggestion, if it were to be implemented, and if bankers were to act on it, would take us back to 2006—to loans being extended regardless of borrowers’ creditworthiness!
The American economy is slowing.
Meanwhile, on the global economics front, the numbers are mostly continuing to lose momentum. Last week, US consumer confidence was reported to have fallen again in July. It currently stands at its lowest level since February.
There, too, credit is the problem.
The problem in the States, as here, is that credit is declining. The Fed’s efforts notwithstanding, personal debt has fallen for eighteen out of the last twenty months. People are not prepared to borrow, nor banks to lend.
The party’s over; the tidying up’s begun.
Personal balance sheets are being recast. Ultimately, that’s healthy; but, immediately, it’s debilitating. So how long will the adjustment take? A couple of years, at least; five, more likely; ten, possibly.
No country will buck the trend.
And it’s a phenomenon that’ll affect the whole world. China won’t be immune. Nor will the commodity producers. On the contrary, high beta is a double-edged sword: outperformance in booms is matched by underperformance in busts.
Equity valuations might nevertheless advance.
Security valuations, though, will probably continue to advance. Interest rates will be kept low and investor liquidity plentiful. Set in the context of profits that bulge as wages are squeezed, equity valuations can be expected to climb. A year hence, the indices may well have moved into all time highs!
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