Economics Views

December 9, 2010

The capacity to observe accurately
is called cynicism by those who’ve not got it.

George Bernard Shaw—we need more cynics and fewer bankers!

Is economics activity quickening or slowing?
The mood amongst most economics commentators is upbeat, but it’s not clear that their optimism is justified by the data. World growth seems to have peaked in mid-summer and to have slowed since then. In the months ahead, the trend is likely to continue—possibly steepen.

The data says the latter, commentators the former.
Underlining the potential for disappointment, last week’s numbers were a little dull. Germany’s exports had faltered in October, and so had Japan’s machine orders. Britain’s retail sales in the autumn were anaemic, likewise the US’s job creation.

What’s unambiguously worsening is the condition of the banks.
But there was even worse news from the banks. Far from improving, their balance sheets were deteriorating again. The rescue packages, launched two years ago, had failed. Lenders that were delinquent then were delinquent still. To survive, they needed continual infusions of taxpayer funds.

The bail-outs were a mistake.
Good money was being thrown after bad. The process was sacrificing what was economically viable in a futile attempt to save what wasn’t. EuroZone countries had led the way, but others, including a number in the emerging world, were likely to have to follow.

Will Britain’s Parliamentary Commission agree?
Coincidentally, it was against this backdrop that the UK’s Independent Commission on Banking began its inquiry. It’d been asked to investigate the charge that consolidation amongst lenders after the 2008 crisis had diminished competition and restricted consumer choice. Last week, a number of the banks’ CEOs were summoned to answer the charge. They attempted, not very seriously, to refute it.

Or will they, like the B-of-E, in 2008 . . .
Competition amongst banks, they claimed, was fierce; choice extensive; and bankers blameless. It was, they contended, market forces that set interest rates! economics uncertainties that limited the provision of credit to small companies and first-time house buyers!! a surfeit of competence, not a of lack of competition, that generated executives’ bonuses!!!

. . . be taken in by smooth-talking bankers?
Self-serving rot, of course. But how will the hitherto spineless authorities respond? Will they admit that it’d been wrong to save the Scottish rascals two years ago, and wrong to save the Irish rogues two weeks ago? Will they therefore commit themselves to not bailing out whoever next comes begging?

Failures have to fail, if successes are to succeed.
Probably not. A precedent has been set. However inept the bank and however clueless the CEO, the bill for misbehaviour is to be passed to the taxpayer. Bad news for the economy, of course. It tells bankers that standards needn’t be raised: failure is condoned not censured. For banks, the role model has become the RMT; for their CEO’s, Bob Crow.

Scarce resources have to be used wisely.
The Bank of England, author of the bail-outs, is substantially to blame for the mess. But the new Government is not blameless. It had two years to think things through. It had the opportunity, on taking office, to reverse the misjudgments of its predecessors.

Better to cut corporation tax than to mollycoddle banks.
It didn’t. It chose instead to compound them, wasting another £7bns, via Dublin. That money would have been better spent reducing corporation tax. If it had been, companies might not be transferring their HQs out of London!

Stock prices nevertheless to continue to rise.
None of this will do much to dent the rally in securities prices. For a few more months, money will be easy, inflation low and profits resilient. The indices may rise by another 15%.


3 Responses to “Economics Views”

  1. david fitzpatrick on December 10th, 2010 12:57 pm

    Sir, Are you thinking of Angela Knight and her “work” at The BBA?
    The phrase ” regulatory capture” seems an undestatment in her context .

  2. Bernard Keeffe on December 10th, 2010 4:36 pm

    One devastating fact has emerged from this debacle - GDP is a useless and utterly misleading measure of a nation’s economic health. The current tables of national GDP per head at PPP published by the IMF and the World Bank put three relevant countries as follows:

    IMF : World Bank

    Ireland 9 6
    UK 13 14
    Germany 20 15

    Faced with this where would a wise investor from Mars put his Martian wealth?

  3. Bernard Keeffe on December 10th, 2010 4:42 pm

    What I intended was to give the placing of the three countries by IMF and World Bank

    Ireland was placed 9th and 6th
    UK was placed 13th and 14th
    Germany was placed 20th and 15 th

Got something to say?

Contact Roger

Send Roger an email using our contact form.

TV Appearances

See Roger on CNBC here. He discusses Greece's problem of being uncompetitive.