When the Governor of the Bank of England says that there isn't a liquidity problem in the context of lending to business but one of solvency what exactly does he mean and why hasn't there been more on this. Most Banks do not have enough capital to cover their liabilities i.e. they were and are bust! And if they claim they are solvent how come the Russians, Chinese and Indians do not believe them both by word and deed. (see various pronouncements from each of these governments in the past couple of years especially Jin Linqun - November 2011)[1]
Well, of course, this is deeply embarrassing to the political and business class of Britain and Europe because it would make clear that there is more pain to come! Taxpayers in Britain and Europe are going to have to fund these losses! Increasing liquidity as has just been announced today (19th June 2012) by the Bank of England - £5bn per month for at least the next 6 months in the UK does not solve the problem but may buy time. That is time to grow the economy so as to generate wealth to help fund the banks' losses.
Another embarrassing aspect is the conspiracy of silence about the exact nature of those losses - what they are and how much of a loss they represent. Without transparency there will continue to be a lack of interbank confidence! That's right they do not trust fellow bankers. Without that confidence there can be no resolution of the problem - everything else is the equivalent of sticking plaster! (See particularly Liam Halligan over many months. [2]. What then happens - and I speak from personal experience ( I am legally prevented from disclosing full details) is Bank borrows from Bank of England at 2.5% and then lends to a platinum plated (public sector) project at 7.9% - the 5.4% then goes straight into the banks bottom line. Colloquially the public is being screwed again by the self same organisations who largely created this mess in the first place and they continue to pay themselves exorbitant and outrageous salaries and bonus's.
This conspiracy of silence (well speaking very quietly without emphasis and moving on very quickly) is a scandal since it is 4 years on from Lehman Bros.! If they do not know their actual liabilities now they are either incompetent or too scared to say. I very strongly believe the latter! Now politicians are not generally dumb so they will have worked this out and clearly their plan is fudge and muddle through rather than radical surgery and a rebuild of the control systems. From the political and business class this approach has (for them) a most desirable consequence - it is the least threatening strategy to their position! Which brings me to the question posed by Niall Ferguson in Reith Lecture 1 19th June 2012 - have the pre-dominance of personal relations in politics and business so corrupted the institutions of government that decline is now inevitable? I believe we are very close to this! I just say in business and politics thinking of a job for life is corrupting - arranging it to be just so is corrupting - and is about obtaining and retaining power - remember Lord Acton on power! So at least some pretty short term limits must be introduced for senior politicians and not as Russia, I have in mind 10 years as an absolute maximum - of course politicians and some business people are arrogant - as Gordon Brown said of Tony Blair his exceptionalism about himself knew no bounds. Having seen many of them over the years this is invariably not justified! Moreover this attitude, which the insiders will say does not exist despite the overwhelming evidence on a daily basis, is profoundly undemocratic. We have the best educated and potentially best informed electorate in history yet we cannot be trusted to take more decisions?
So who pays:
It's the same the whole world over It's the poor what gets the blame It's the rich what gets the pleasure Ain't it all a bloomin' shame?
Billy Bennett - 1930
This Music Hall song sums up how most people feel and why wouldn't they? If you
are on the minimum wage in Portugal and Greece then you have just had your
income cut by 20%. They would like to know how they caused the financial crisis of
2008. Of course they did not! But their politicians are likely to be very culpable by
not reforming and especially not securing the transparency necessary for markets
to operate effectively and not collecting taxes from the rich! We should also not
forget the contribution of massive de-regulation from the 1980's and light touch
regulation have made to the financial crisis. Too many thought this meant they
could do as they pleased and did so! This puts into context those who argue that
a significant part of the solution is more de-regulation? This cannot be right unless
you are a free market fundamentalist. No it is about designing systems that
require appropriate behaviour and the failure to behave appropriately results in
prohibition from that area of business. Anything less will not work and will
encourage just the sort of corruption to which I referred to earlier.
What is the skeleton of appropriate behaviour - ask yourself these questions:
a) is this action I am about to take about putting myself first before anything or
anyone else?
b) will this action I am about to take strengthen the institution within which I work
or weaken and corrupt it?
c) does this proposed action increase or decrease transparency in the market
place?
d) does this action have a purpose other than simply enriching me - e.g. will it
create employment?
e) against the background of the moral framework within which I wish to work
is this proposed action the right thing to do?
Notes and background references used in this article
[1] http://www.theresilientfamily.com/2011/11/chicoms-call-european-socialists-slothful-indolent/
[2] http://www.telegraph.co.uk/finance/comment/9336435/Bank-throws-kitchen-sink-at-credit-problem.html 16th June 2012
published 19th June 2012
http://www.independent.co.uk/news/business/comment/satyajit-das-europes-problem-is-not-one-of-liquidity-but-rather-solvency-6281205.html 24th December 2011
6th October 2011
