Recession Risks Remain in 2011
December 31, 2010
There is a risk of another recession next year, protectionism could cause major problems in 2011 and recent stock market strength could be curtailed, Roger Nightingale, strategist, told CNBC Monday.
“If the … world economic cycle is going to be turning down in the second half of 2011 and if in addition to that you get tight money, we could get a fairly steep downturn. We could have another recession,” Nightingale said.
Many parts of the world are beginning to tighten liquidity in a bid to tackle inflation, Nightingale said after China raised its key interest rate over the weekend.
“That which has been fuelling the rally is going to be withdrawn … the capacity for the market to rise will be diminished,” he said.
The positive stock market momentum will likely remain for the first part of the year, but problems could become apparent as the year wears on, he added.
One of the key risks investors face in the new year is protectionism, according to Nightingale.
“If you get protectionism nearly everything goes wrong,” he said.
When some countries are more competitive than others, “the temptation to go down the protectionist route is very high indeed,” according to Nightingale.
When protectionism occurs, the best economies tend to suffer most, Nightingale said, adding that China could suffer protectionist measures at the hands of Western governments in Europe.
Recession Risk Remains in 2011
December 31, 2010
CNBC Television
27 December 2010
There is a risk of another recession next year and protectionism could cause major problems in 2011, Roger Nightingale told CNBC.
Economics News
December 31, 2010
Timing is crucial in sport;
no less so in politics and investment.
Governments have to know when to cut public spending and central bankers when to raise interest rates. Neither group has a good track record.
Is Cameron really complacent about the UK economy . . .
In his New Year message, the Prime Minister focused on perceived security rather than real economics. A psephologically astute decision! While the outlook on both fronts was poor, voters tended to be more forgiving of misanalysis in the former than in the latter.
. . . or just trying to distract attention from it?
The speech glossed over earlier errors of judgment. It didn’t claim, for instance, that participation in Middle Eastern wars in one period contributed to security problems in the next. Nor that heightened public spending when resources were plentiful prejudiced financial stability (and economics virtuosity) when they weren’t .
The problems are mostly the fault of his predecessors.
Why not? Because that would have opened the PM to the accusation that, on taking office, he’d been slow to reverse the mistakes of his predecessors. Guilty as charged, of course: half-hearted in his proposals for withdrawal from Afghanistan and Iraq; ambivalent in those for rebalancing the budget.
But his economics instincts seem no better than theirs!
On the fiscal front, he’d argued that spending cuts ought to be deferred until the recovery had deepened and broadened. Sensible enough provided activity was going to revive. Not if it was going to stall—which is what it did.
But his economics instincts seem no better than theirs!
The cycle had been misinterpreted. Growth during the first six months of his term faltered; recession loured. Delaying the cuts in such circumstances would cause them to coincide with the next downturn. Pain would be intensified, not mitigated!
The PRC will contribute to the slowdown.
It wasn’t just the Brits who seemed unconcerned with the chronology of the economics cycle. The Chinese Central Bank had chosen to raise interest rates again. In the accompanying communiqué, officials were keen to underline their commitment to contain inflation
Competitiveness is a double-edged sword: sometimes, begetting riches; sometimes, protectionism.
But how much would real activity slow as a result? Would higher interest rates raise or lower the risk of protectionism? Nobody at the PBC was willing to hazard a guess (similarly, the Fed in 1929 and the BOJ in 1989). Officials knew that there were risks associated with what they were doing, but were unable to quantify the downside; still less gauge its containability.
The EuroZone is a mess; a disaster in the making.
The ECB was no less blasé. It was heading, by default, for tighter money; and hadn’t a clue of the likely consequences. Trichet didn’t have the resources to counteract the unwillingness of private investors to hold the euros of “suspect” economies. The latter were being hung out to dry! Saddled with overvalued currencies and penally high interest rates, they’d suffer agonies.
Australia, Brazil et al might be vulnerable as well.
Commodity producers possibly likewise. They had no problem so long as their terms of trade stayed strong, but they’d suffer more than most if a reversal were to set in. Was one due? Long over-due! In 2012 and 2013, it was not inconceivable that these countries would be treated much as the periphery of Europe was now.
America is the best of the bunch.
The US, by contrast, looked quite good. Its public spending had been cut when activity was quickening. Its labour costs, public and private both, had been squeezed concurrently. The dollar had fallen significantly. As a result, its output was now competitively priced and its debt acceptably low.
Like the FDR, the US is competitive; but, unlike it, has no invalids to support.
Sentiment, meanwhile, was quite good. Depressed when it didn’t need to be strong, it was resilient when it did. The labour market was the litmus test. Disappointing in 2009 and early 2010, it was looking much better now. If continued in the early part of 2011, consumer spending might hold up reasonably well; GDP similarly.
Credit taps won’t stay closed for long.
In most parts of the world, monetary austerity wouldn’t last for long. Inflation would fall rapidly even if commodity prices held up. Interest rates would follow suit. Activity, though; would it revive?
But easy money doesn’t always revive the sick.
In the States in the thirties, and in Japan in the nineties, it hadn’t. Instead, economies were stuck for protracted periods in a state of barely animated debility (abyssus abyssum invocat). Could that happen again?
Might slowdown give way to recession? recession to depression?
Of course! Is it inevitable? Probably not. But to avoid the difficulty in the first place, it would have been best not to overstretch economies: not to ramp up public spending, not to bail out delinquent banks; not to create senseless currency blocs!
Markets will hold up if the setback is mild.
How will the markets respond to developing economics problems? Initially, not well. At the moment, for instance, suddenly mindful of the issues, they’re falling. They might do so for a while longer. But a moderate recession won’t pose serious problems. Falling inflation and resilient margins will support the indices.
But not if it’s severe.
Not so, a cataclysm. If the politicians and central bankers miscalculate again, the rest of us—workers, pensioners and investors—will pay a heavy price.
Economic News
December 31, 2010
Members of a group who, singly, can do nothing;
Will, jointly, decide that nothing can be done.
Fred Allen—the upside of any committee is that it’s rarely disastrously wrong; the downside that it’s rarely spectacularly right.
To tighten or not; that is the question:
In recent months, the Bank of England has been in two minds: torn between expanding credit to prevent recession and restricting it to inhibit inflation. Hitherto, the doves have been in the ascendant. They’ve kept interest rates at negligible levels and liquidity plentiful.
Whether ’tis better to suffer
The policy has produced a generally satisfactory outcome: economics activity has progressed in line with potential; consumer prices have accelerated only modestly; and asset valuations have risen impressively.
The slings and arrows of outrageous inflation
Will 2011 bring more of the same? Probably not. Opinion in the MPC is shifting. It’s being argued that monetary policy may shortly become less efficacious: the continuation of policies of cheap credit won’t prevent recession, but will aggravate inflation.
Or take arms against recession
That’s partly because the business cycle is due to peak in autumn 2011. Between now and then, underlying growth is forecast to moderate; afterwards, possibly to turn negative. Preserving the economy’s momentum in such circumstances would be difficult; at the very least, it’d require a recklessly accommodative monetary policy.
And, by opposing, try to end it?
But that would set inflation at risk. It’s been quickening in the recent past, and there’s a chance of its surging in the months ahead. If sterling should soften and commodity prices continue their rise, the trend might be reinforced. If, concurrently, pay settlements were to creep up, it’s possible the pressures would become irresistible.
An end to cycles?
But, say the hawks, there’s an even greater threat. Persistently easy money is bound eventually to cause the country’s financial status to be downgraded. If perceptions of creditworthiness are undermined, gilts will be spurned and their yields forced higher.
‘Tis a consummation devoutly to be wish’d.
At some stage, in order to restore confidence, monetary austerity will have to be re-imposed. That’ll dent the economy. If implemented in the context of a cyclical downturn, it’ll very possibly spark a savage recession.
But, in the aftermath, what nightmares might come?
It’ll be fascinating to see how the MPC votes in the New Year. If the increase in VAT should raise headline inflation and prompt demands for fatter pay rises, it’d likely that members’ attitudes will harden. One or two wavering doves might side with the hawks. In that event, the base rate could start to rise by spring; and be up to 2½% by yearend.
The whips and scorns of irredeemable debt?
Cameron and Clegg ought to be worried by such a scenario. They’re not popular now. A year hence, with repossessions and unemployment soaring, they’re likely to be less popular still.
The undiscover’d country from whose bourn
It’s the LibDems who have most need to rethink their positions. If they continue to press for higher social spending and for maintained state employment, the economy’s slippage will be sharper and the rebalancing of its finances take longer. Likewise their party’s poll ratings!
No rescheduled debtor returns?
What they ought to be doing is trying to hasten the spending cuts. They have to realise that inflation in Britain at the moment is largely a public sector phenomenon. To contain it, and set the scene for justifiably low interest rates, they ought to be demanding much more modest pay settlements for those employed by the State.
Only the dread of something
It was insufficient for the Governor of the Bank of England and his senior colleagues to take no pay rise. Their packages should have been cut by 15%. Arguably, on performance-based criteria, by 25%!
Beyond financial failure
A fortiori, senior staffers in the regulatory authorities; and their equivalents in the publicly owned banks; and those in the local authorities. They’ve all performed badly; all been over-compensated in the past; and ought all to be tightening their belts now.
Makes us rather bear those ills we have
That’s how things have panned out in the US. Workers’ incomes, in the public sector as much as the private one, were squeezed sharply in the first two years of the setback, and are now in a position to recover. Inflation is low and likely to stay low. Interest rates likewise.
Than fly to others that we know not of!
American public spending was cut quite sharply at an early stage. As a result, it’s possible now to start to think about cutting taxation. Activity is rising reasonably briskly and sentiment is satisfactory. The incumbent administration isn’t yet politically popular, but there’s a possibility that it will be two years hence! The LibDems, by contrast, if they were allowed to behave as they wished, would never be represented in Westminster again!
Procrastination did for Hamlet; it may do so as well for the B-of-E.
Asset valuations continued to rise in the closing weeks of the year. Adjusted for currency and dividends, equities in much of the world had a good (not spectacular) 2010, and are currently close to their all time highs. Many will continue to advance in the early months of 2011. But the threat of monetary austerity hangs louringly over the second half!
A Closer Look at the Markets
December 22, 2010
CNBC Television
17 December 2010
Roger Nightingale, economist, joined CNBC on Friday to take a closer look at the markets.
Economics Views
December 22, 2010
When your horse shows signs of incapacity,
turn him out to graze.
Horace—not just horses, but politicians also; especially those suffering from aegri somnia!
Wedded bliss is rare.
Marriages that are contracted in haste tend to be regretted at leisure. That may apply as much to the political variety as the conjugal one. Britain’s Coalition between Tories and LibDems illustrates the point.
It requires conceit to be suppressed.
At the outset, there was a good deal of optimism; each party feigning compromise and goodwill. It didn’t last. As 2010 drew to a close, barely six months after the deal was signed, each distrusted the other.
Some people find that impossibly hard.
Will they stay together for a while longer or separate immediately? Probably, the former. A rupture now, leading to an election in a few weeks time, would destroy the LibDems. Their popular support is half what it used to be; they’d be lucky to keep more than a handful of seats in Westminster.
Most LibDems, for instance.
Accordingly, while the Business Secretary, a man of inestimable naïveté, may talk about deployment of the “nuclear option,” the threat will not impress colleagues, nor worry partners. The LibDems are as optionless now as their predecessors were in the thirties. They have to live with the marriage they contracted; they have to hope that the economy improves and that the electorate forgets.
Vince Cable was a brief candle.
For the Business Secretary himself, there will be no comeback, no redemption. He’s finished as a politician: ostensibly, still in the Cabinet, he’s effectively out of it. Nobody’ll ever trust him again.
He lacked intelligence and discrimination.
What caused him to say the things he did? Why so indiscreet in front of strangers? Because, it is suggested, he’s a man of extraordinarily bad judgment. His analysis of the banking problem was poor, and the remedy he recommended for it worse; his assessment of the university tuition problem banal, and the solution he proposed for it puerile.
And had no understanding of finance.
But it was his lack of focus on public sector excesses that will weigh most heavily against him. On the day on which news of his indiscretions broke, November’s record borrowings were announced. Did he, the Business Secretary, fret about the deterioration? No. He continued to press for higher levels of social spending. He was another Nero; a man who fiddled discordantly while fiscal Britain burned.
Let’s hope David Cameron is better endowed.
The Prime Minister must get a grip. If happy-clappy spenders aren’t soon disciplined, the country’s inflation rate and credit standing will be threatened. The previous administration missed the chance to time the cuts to coincide with the economy’s upturn (mid-2009 to mid-2011). So the current one has had to delay them until its downturn (2012 and 2013). Politics will become very difficult in that period. It’ll not be a time for bleeding-hearts.
Equities have been performing well.
Hitherto, London’s equity markets have held up well: inclusive of reinvested dividends, the indices have risen recently to all-time records. Easy money and strong profits have been the driving forces. An expectation that the recovery would “broaden and deepen” in the next couple of years added to the optimism.
They’ll continue to do so for a while.
The reality may be less favourable. Economies will slow from the second half of 2011and credit, albeit inappropriately, may be tightened. There’s no near-term threat to the indices, but it’d be surprising if the advances were to continue much beyond late summer.
Economics News
December 22, 2010
Complete abstinence is easier
than perfect moderation.
Saint Augustine—and, in things like credit availability, much more dangerous!
The periodicity of a pendulum is regular.
Economics activity progresses cyclically: relative to a fairly stable underlying trend, GDP tends to advance and retreat according to a regularly recurring chronology. Central Banks acknowledge the cycle, and try to dampen it. They know that inflation is likely to rise in the second half of an upswing, and unemployment in the comparable part of a downturn.
So is that of an economy.
To avoid both Scylla and Charybdis, Central Banks have to steer a middle course. Monetary policy has to be counter-cyclical. Credit must be curbed when activity is high and quickening; enhanced when it’s low and slowing.
Central Banks usually operate an offsetting credit policy.
But, sometimes, arguably far too often, the authorities get things the wrong way round. They tighten when it’s appropriate to be loosening; and loosen when it’s appropriate to be tightening. Instead of dampening the cycle, they exacerbate it. Instead of reducing the risks of unemployment or inflation, they increase them.
But, occasionally, a reinforcing one!
How come? It’s partly because they mis-analyse the cycle, but mainly because they’re thrown off course by unforeseen “events.” In the recent past, for instance, there was a hiccup (a banking crisis) in the second half of 2008. Had it not happened at that time, the authorities would probably have started to tighten credit in advance of the anticipated cyclical recovery.
There’s a risk of that happening now.
Instead, they persuaded themselves to stay in a loosening mode. They judged it more important to stabilise the banks than the cycle. They argued that equilibrium in the latter was impossible unless it occurred also in the former.
It was caused by their response to the banking crisis.
But they’d underestimated the extent of the problem. Though the transfer of resources from non-banks to banks had been mind-bogglingly huge, it failed to restore equilibrium. Indeed, it made things worse: banks weren’t saved, but many non-banks were destroyed.
A mistake to try to redeem the irredeemable.
In the years following the crisis, the extent of the authorities’ miscalculation gradually became apparent. Overall liquidity had been persistently excessive, but the condition of banks’ balance sheets deteriorated. Their lending to the wealth-creating parts of the economy was hopelessly inadequate; but their payment of bonuses to themselves, unconscionable.
It didn’t stabilise economies . . .
The non-bank economy, meanwhile, was unbalanced. In sectors in which activity was progressing moderately satisfactorily, there was a risk of inflation. In those in which inflation was satisfactory, there was a risk of recession.
. . . but destabilised them.
It began to dawn on a fretful world that the course being steered by the Central Bankers would not avoid both monsters; it might instead encounter both. Unemployment might rise concurrently with inflation. It had happened already in parts of the EZ; it might become commonplace in 2011.
And politics may make matters worse.
And politics was beginning to be unhelpful. Elected legislators didn’t usually say much about credit policy, but these were unusual times. In the US, for instance, the Republican Party was doing very strange things. Sarah Palin got all the publicity, but Ron Paul wielded the bigger stick. He wanted the fiscal deficit slashed and credit curtailed. If he got his way, the policy might be implemented just as the economy hit the skids at the end of 2011!
In the States and Germany . . .
Chancellor Merkel likewise. She’d now realised that the single currency was doomed. Monetary union required political union. It’d work in Europe only if Germany were prepared to pick up the tab for the debts for all the other countries. It wasn’t.
. . . there’s an appetite for austerity.
Ms Merkel was the paymaster. And her man at the Bundesbank, Axel Weber, was about to become the effective boss of the ECB. He’d say money must be tightened. It probably would be, and might coincide with a similar trend in the States. If so, and if China acted similarly (to contain inflation), the world could find credit scarce and expensive in the latter part of next year—at precisely the time that the cyclical downswing was getting under way.
Depression can’t be ruled out.
That’s what happened in the States in the early thirties. It’s what happened also in Japan in the early nineties. Could it happen on a global basis next year? If it did, economies would suffer severely, and asset valuations significantly.
No immediate risk, but time to begin to think defensively.
Which would suffer most? A lot would depend on how protectionist the world had become by then, but, as a general rule, it’d be sensible to lower the weightings attached to the high betas (economies as well as stock markets). Investment skill would lie in avoiding losses rather than making gains.
Economics Views
December 22, 2010
In times like these, it helps to recall that
there’ve always been times like these.
Paul Harvey—what changes are perceptions of the extent of the unusualness!
Inflation in the UK is above par.
November’s inflation number was a little higher than expected. At 3⅓%, the increase in the CPI in Britain in the preceding twelve months wasn’t absolutely awful, just relatively disappointing. Other countries experiencing comparably fast activity and similarly soft currency had reported much lower figures.
Probably the result of public sector excess.
What was the problem here? Not the private sector, but the public one! The former had behaved responsibly, the latter irresponsibly. The one had kept pay rises restrained and productivity advances brisk. The other had been allowed to run amok. In the decade prior to the financial crisis, the public sector had experienced no financial discipline; and in the years thereafter, none either.
It can’t go on.
Predictably, Gordon Brown’s administration had turned a blind eye to the excesses prior to the poll. Less predictably, David Cameron’s had winked at them afterwards. It’s unlikely that the indulgence will last much longer, though.
There are substantial savings to be made in pensions.
If the fiscal deficit is to be cut by enough to comfort the financial markets, there will have to be a severe squeeze on public sector budgets. In the near term, that’ll mean cuts in employment levels and reductions in real pay. Later on, pensions entitlements will have also to be regularised.
They’re long overdue.
Why the disparity between the two parts of the economy has been allowed to persist for so long is reprehensible. The cost of public sector pensions is at least 40% of salaries; it’s barely 15% of the private sector number. Governments recognise the unfairness, but have usually lacked the courage to tackle it—understandable in an administration that’s on the way out, but very discouraging in one that’s newly elected.
But difficult to engineer in coalition.
Coalitions are difficult to operate, of course. It’s difficult to balance the aspirations of contending elements. The leaders may be relaxed, the grassroots are often at each others’ throats.
LibDems, unsurprisingly, are proving unreliable.
In Britain, the surprise is not that Tories and LibDems are irritated with each other, but that it was university tuition fees that caused the problem. What will happen when matters of genuine principle are at stake? The wars in the Middle East, for instance? The disaster that is Europe? It doesn’t bode well.
Obama, though not in coalition, is also having problems.
In the United States, the politics are also looking troubled. The economy is satisfactory—growth in line with potential, inflation low, and deficits moderating—but the administration is haemorrhaging support. Conservatives fret about public spending and quantitative easing. Progressives balk at the slow progress in dealing with the wars.
Likewise, much of the rest of the old world.
It’s somewhat similar throughout the old industrial world. Few Governments would survive a near-term election. Voters’ expectations haven’t yet been lowered sufficiently. For the moment, perhaps for another five years, incumbency will be a big disadvantage.
Markets may rise further, but clouds are gathering.
Stock markets, on the other hand, are temporarily well placed. Liquidity remains plentiful, corporate profits strong, and inflation moderating. It’s the medium term that investors have to worry about. It looks as if monetary conservatism may eventually become the norm. The Republicans in the States may impose their will on the Fed, the Bundesbank on the ECB, and China’s monetary hawks on the Central Bank in Beijing. If so, economies will falter and asset valuations retreat.
Economics News
December 12, 2010
A university education helps you despise the
wealth that it stops you getting.
Russell Green—there’s causality between educational standards and economics growth: it goes from the latter to the former!
During horrific Middle Eastern wars, university students were quiescent.
The undergraduate and the banker share many characteristics: unconscionable selfishness and financial naïveté, for instance. But both, rather ironically, have very high opinions of themselves. They suppose the contributions they make to the community to be high, but the costs they impose on it low!
They marched only when their handouts were threatened
Last week’s events highlighted the parallel. Neither Parliamentarians debating tuition fees inside the Chamber, nor students terrorising the streets outside (the one puerile, the other neanderthal) seemed to have a firm grasp of the issues. It had been much the same when the Bank of England attempted to save RBS and HBOS in 2008: the Governor and his Deputy acting boldly, but not very responsibly.
Blame the Bank of England!
They recommended that the bad banks be saved, not closed; that taxpayers’ funds be sequestrated to this end. It set a precedent. If the taxpayer could be forced to bail out a delinquent bank, why not an underperforming university as well? And if the greedy banker was to be rewarded for his incompetence, why not the covetous undergraduate for his folly? King and Tucker have a lot for which to answer!!
Of course, the student must bear a large part of the cost of his education.
The reality is simple. Education is expensive; university education very expensive. But who’s to pay the bills? There are only two alternatives: the general taxpayer or the student himself. Both may benefit from higher levels of educational attainment, but the lion’s share accrues to the latter. It has to be he, therefore, who pays the bulk of the cost (delayed, of course, to suit his cash flow profile).
If he can’t see that, he oughtn’t to be at university.
How could people come to any other conclusion? Only bankers might be avaricious enough, LibDems dim enough, to propose anything else. Did the thousands of students who marched up Whitehall not understand? Or did they just pretend not to? Were they fools or knaves? It’d be a damning indictment of their intellect if the former; a damning indictment of their morality if the latter!
And the banker, coincidentally, shouldn’t be in a bank!
It’d be a different matter if people were being forced to go to university. They’re not. If they no longer find the deal attractive, let them not go. How do they respond to this line of reasoning? Angrily. They want it both ways: they want an option which lets them keep the profits if the trade goes as intended, but to pass on the losses to others if it doesn’t! Does that sound familiar? It certainly does!!!
Nor the LibDem in a Coalition.
And what of the Coalition? Can it survive? Not for long. The LibDems, like the Liberals in the thirties, are disintegrating. The party does not have much of a future. It may not exist after the next election. It’s possible instead that it’ll divide into three parts: one being absorbed by the Tories, a second by the Socialists and a third by the Greens.
Economics activity is moderating.
The world economy, meanwhile, is drifting into slower growth. China looks as if it’ll be the swing factor. Last week, the authorities indicated that they’re going to tighten liquidity fairly sharply. They’d prefer to slow things down a little straight away, rather than a lot later on. Of course they would! But there’s a risk that the setback is immediate and severe.
In America, tax rates’ll be cut.
In the US, the Republicans look as if they’ll be able to get the tax reductions they want. Will that boost consumption and investment? Probably not. But it’ll have one big advantage: it’ll force them to keep public spending under wraps.
In the EZ, attention’ll focus on the fiscal deficit.
In Europe, attention is still focused on the single currency and on what the authorities there think sets it at risk: the fiscal deficit. In Greece and Ireland and elsewhere, therefore, public spending is being slashed and taxation lifted. The outlook for some of the economies is consequently poor: their GDPs may fall at more than 5% per annum for several years.
High beta is a double edged sword.
Will the emergers and the commodity producers hold up in these circumstances? Probably not. They’ll share in the pain. They’re high beta economies. They’ll fall faster than the average for a while.
Valuations to continue to rise.
Markets, though, will hold up—in the short term at least. They were temporarily depressed by the euro’s troubles, but bounced back as soon as the immediate crisis passed. Valuations of both bonds and equities are expected to continue to rise. Easy money, low inflation and resilient profits will do the business.
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%.