Tuesday, May 5

In my View

Banking is too important to be left to Bankers is the conclusion of a report issued last week. The effects of the continuing banking crisis will be felt for generations, a committee of MPs has warned last week.

The Treasury committee, in its second report on the crisis, said that it had been caused largely by the banks' own reckless behaviour. "Bankers have made an astonishing mess of the financial system," said committee chairman John McFall MP adding "The culture within parts of British banking has increasingly been one of risk-taking, leading to the meltdown that we have witnessed''. Though as most small business operators will confirm that risk taking has not in fact been with banks lending to small businesses - the risks were taken, as is now well recognized, with reckless domestic mortgage lending and irresponsible and unaccountable high risk strategies in the complex and mysterious world of hedge funds, dodgy derivative bank securities and over investment in overseas emerging markets.

The scale of the losses incurred by the banking sector is difficult for most people to comprehend the figures are truly colossal. The total losses of British banks so far are a huge £207 billion of which only a third has so far been written down. The much troubled euro zone banks have lost £600 billion but have only so far written down 17 per cent of that loss. The low ratio of write downs by the banks is an indication that the banking sector's woes are far from over, the crises has yet to reach rock bottom and the consequential misery is likely to cast a further cloud over the business world, particularly small businesses.

This recession unlike the recession before or indeed the one before that is different in that this down turn in the economy is bank lead. The solution to the economic crises thus cannot be found within the banking world for they are the problem not the solution.

Contrary to the claims being made by banks many small businesses whose growth is fundamental to the economy are finding it very hard to obtain loans, except with much higher charges and fees. This is a situation that is being closely monitored by the Federation of Small Businesses' FSB Bank Watch scheme. Their detailed scrutiny of the banks will need to be long since despite optimistic noises from corporately closeted bankers there are dark storm clouds building in Europe which will threaten recovery on our shores.

We will do well to pause and remember that back in the '90s British bankers with the support of most of the corporate world (but not small businesses) and many politicians were spending vast amounts of money urging us to join the single European currency, the euro. Had this powerful group had their way the banking crises and economic cries that we are all in some way suffering from today would have been far worse than it is.

A large slump in the economy in Europe and the increasing likelihood of the collapse of the euro - a currency that is used by 16 nations in the so called euro zone - is a huge storm in the waiting. The most important fact about the euro as a currency that is not understood by most people is that it is a political construction and is therefore doomed to failure; it is only a matter of time. Recently I emailed five investment managers from large corporate fund managers seeking their opinion on the effects on equity markets of the demise of the euro. Without exception the answers I received demonstrated an acute (a depressing) lack of understanding of the political reality of the euro; an example that investment 'experts' work in a very self focused bubble.

The euro is not the product of a market driven economic process but is rather the product of a political idea. This means that from it’s inception, European monetary union (the euro) has served a political function to which economic and financial realities were always to be subservient. In short, when times get tough it won’t work and sorting out the mess of the euro's inevitable collapse will cost the banking world and the tax payer huge amounts; this will impact further on the UK despite the fact that we rightly rejected entering the euro twelve years ago.

The arguments for not joining the euro club at its inception are more true today, particularly the fatally flawed notion that one exchange rate and one interest rate are appropriate for economies with very different and disparate histories, structures, performances and sovereign governments. There are also institutional problems with the management of the euro which are now causing big problems, notably that the institutions of the European Union suffer from a well known ‘democratic deficit’. The European Central Bank that controls the euro lacks the kind of transparency that characterizes both the Federal Reserve Board in the US and the Monetary Policy Committee of the Bank of England.

When the euro fails as one day soon it will, the cost to the people of Europe will be huge, some of that cost will inevitably impact on the UK economy which we can ill afford on top of the cost of the current rescission.

So there we have it a very gloomy state of affairs. The lesson, in my view, is that Corporate Bankers, Investment Managers, Politicians when left un challenged cause economic mayhem, that is all the more reason for an effective well informed media and attentive lobbying organisations.

No comments: