Monthly Archives: May 2011

27th May – Regulating the impossible

There has been a good deal of speculation in recent days that the European Central Bank is going to water down its Basel III rules. This has been strongly denied by Michael Barnier, Commissioner responsible for the EU’s internal market.  

The proposals for increasing the Tier 1 capital requirement to at least 7% (10% in some cases), seem to me to be extremely sensible. In essence such rules would reduce the banks’ abilities to use leverage. In theory this will help ensure they engage in less risky behaviour.

However as with any reform of the banking industry, the opposition is fierce. Well funded lobbyists and PR agents are claiming that such rules will severely impact the banks’ competitive positions and threatens the recovery in Europe. At the same time it looks like there are serious concerns that if Europe does press ahead with Basel III America will not.   

Assessing Basle III is extremely difficult. This highly specialised subject matter is complex and broad. In trying to legislate for any possible outcome based on historical precedent, surely this will just miss whatever specifically causes the next problem. After all history doesn’t repeat itself but it does rhyme.

Whatever rules are put in place will certainly be picked apart over the years by the brightest and best legal minds the financial industry can buy. If there is one thing bankers have proven themselves to be adept at it is manipulating and circumventing rules and regulations. In the past this has been called financial “innovation”.

I am in favour of banking reform. Basel III certainly has the potential to help improve the sector, but there are still concerns.

Part of the reason that politicians don’t like dealing with financial reform is that it invariably results in hard fighting against well backed, intelligent, manipulative opponents. Frankly there are easier fights to be had elsewhere. Once Basel III is passed my concern is this will be seen as the end of the matter. Politicians will persuade themselves and the public that the next crisis has been averted as a panacea is now in place to stop excessive banking behaviour.  Continue reading

24th May 2011 – Moody’s assessment of a Greek Default

Regular readers of this column will know that I am not usually one for believing headlines explain market movements. However recent skittishness in global equity markets is being attributed to ongoing concerns about the impending European debt crisis.

This is certainly the issue of the moment and Moody’s assessment today can have done little to lighten the mood. For me the critical point made is that the impact of a Greek default “would be hard to predict and even harder to control”.

Now we might view this as a statement of the blindingly obvious, but at least it shows some official recognition of the severity of the situation. Historical precedent is not on the side of policy makers. Similar such events have had drastic affects far and wide, but the most perilous aspect (dare I say “unprecedented” even?!) of this failure will be what it will mean for the European Union?

Moody’s admits the economic headwinds Greece is fighting against are immense. “Since the bailout program for Greece was first announced in May 2010, the country’s default risk has continued to rise due to (1) weaker-than-expected economic growth, (2) underperformance against debt consolidation targets, (3) growing political protests in reaction to planned austerity measures, (4) declining market confidence and access, (5) as well as the increasingly mixed messages from Greece’s supporters.”

In summary, barring a miracle, a Greek default is now inevitable. Continue reading

18th May 2011 – Inflation not going away

Today we heard that UK inflation is up to 4.5%. This figure is alarming, but what worries me more is the assertion by the Bank of England that it will drop from 2012 onwards.

In “normal” times interest rate policy is usually determined by inflation and the outlook. Historically when inflation has risen, so have rates.

If we accept that the historical norm for inflation is a rate somewhere between 2% and 3%, then 4.5% is a cause for concern. Although not as bad as previous cycles of extreme inflationary pressure there is a key point to remember.

Another historical norm concerns interest rates. These have normally been somewhere between 5% and 8%. They now stand at 0.5%

With China feeling more intense demands to raise wages, several trillion floating around the financial system in stimulus money and rising commodity prices (certainly linked to fiscal stimulus), it is clear that the inflationary outlook is not too healthy.

However our anaemic economic growth is apparently supported by rates of 0.5%. A point is coming when central banks will be forced to increase rates to dampen inflationary pressure. In fact we have probably already reached that point. Continue reading

16th May – A Greek Farce

We’ve all heard of Greek Tragedy, but what is now being played out in the European corridors of power can only be viewed as a Greek Farce.

I read over the weekend comments from the Greek Prime Minister that there is apparently one “sensitive issue” in discussions over a new bailout, namely “to ask us for an island or monument as a guarantee is nearly an insult”.

This made me laugh so much.

Such is the reckless determination to force through yet another bailout that European policy makers seem to have floated this ridiculous idea. It succinctly encapsulates both their desperation to preserve the status quo and their obstinate refusal to acknowledge the hopelessness of their cause.

In scrabbling around for anything that might represent collateral European leaders are clearly telling the rest of us that they recognise that any additional bailout money is simply throwing good money after bad. They don’t expect to get their money back. The first bailout hasn’t worked and it is impossible to see how the second will succeed.

Greece is bankrupt and will default on its debt. There can be no doubt of this.

Whether or not German voters would stomach the capture of islands in the Aegean in exchange for billions wasted tax revenue is highly debatable. This is not 1939 after all!!!

According to press reports the Greek fire sale of assets such as airports, motorways and such like has stalled. At the same time the national debt in relation to GDP has continued to increase. It now stands at 166%. And this is all against a backdrop of serious social discontent.

How much longer can this situation last?

13th May – Waking up to reality

In time I believe the Credit Crisis will be viewed as a catalyst for a significant redistribution of a large portion of the World’s wealth from the developed world to the developing world.

Countries, such as Britain, need to face up to the fact that we are experiencing the start of the process of a general decline in living standards as a result of reduced income.

Although the decline in real terms will be less pronounced than in comparative terms, it is still going to take some getting used to. I am not at all convinced that politicians have yet sold this view to affected populations. Given the outcome is unavoidable and the understanding is lacking these two opposing forces are bound to create social friction as the new paradigm becomes reality.

According to yesterday’s release by the Institute of Fiscal Studies, British Households are now facing the biggest drop in income in 30 years. As inflation continues to put pressure on spending power and the “recovery” fails to materialise, then the drop in household income could well turn into the biggest ever recorded.

But would this be such a bad thing? Continue reading

11th May 2011 – Inflation

I wrote yesterday that all interest is focussing on Greece at the moment. I mentioned that this is taking away attention from other substantial problems facing the global economy. I failed to include inflation as one of my examples.

Perhaps this further illustrates yesterday’s point, but whatever the case inflation is back.

Bank of England Governor, Mervyn King, has been forced to upgrade inflation predictions for 2011, to 5%. However he still is doggedly sticking to the view that this situation will start to come back under control over the course of 2012.

Now I might have missed something, but there are several factors, which surely contradict this view.

First, we have just been through an explosion in the money supply. Two bursts of Quantitative Easing and record low interest rates have put anywhere upwards of $1trillion into the system (does anyone really have an idea as to what the actual figure is?!). Historically increased money supply increases the velocity of money, which in turn pushes prices higher (inflating them!). Given that neither gush of money has really solved the Credit Crisis and that this appears to be the policy makers’ method of choice is it too unreasonable to expect a third round of QE?

Even if a third round doesn’t happen, interest rates in the US are set to remain low for some time yet. We need only to consult some basic charts of commodities and stocks to see the effects this increased liquidity is having. That there has been so much of it created will surely only serve to support prices in the medium term. Continue reading

10th May – Pain Postponed

The problems of the PIGS are just refusing to go away

As we enter the summer it looks like one issue is going to dominate all others. While the Greek crisis is by no means the only major challenge still facing the global economy, only the inevitable default will allow attention to move to other pressing concerns (not least the state of the American and British national balance sheets).

Even if Greece somehow manages to act on its austerity promises and the ECB is able to coordinate another bailout or rehash the last one, this crisis has surely gone beyond the point of no return.

Global economic “recovery” is still tenuous. Apart from default, the only other course open to a debtor to pay debts is through increased revenue. The firesale of Greek assets (which in itself has run into difficulties) was only ever going to provide a temporary salve to the problem. The simple fact is that the growth Greece requires to trade its way out of difficulties, just isn’t obtainable. The market is not there to support it.

Greece has been running a structural deficit for years. For this to be tackled effectively requires bold action, which various Greek governments have been unable or unwilling to pursue.   

There has already been a lot of civil unrest caused by attempts to impose austerity and this is only likely to get worse.

It really is time for Europe to face up to the reality of a Greek default. The sooner it does this the sooner it can deal with the consequences start the process of recovery. The longer that this situation is left unresolved the less able European leaders will be to restructure as their reputations are shredded by their clumsy handling of this crisis. After all who really trusts an ostrich to lead?

9th May 2011 – PPI, yet another banking scandal

As we reach the conclusion of yet another banking related scandal I find myself asking once again “was it really worth saving the financial system?”

I realise that this question has become this blog’s leitmotif, but it strikes me that the financial system poses the greatest threat to capitalism. Somehow this industry, which seeks to rip its customers off at every opportunity it gets, has managed to persuade our political leaders that they are too important to fail.

The Payment Protection Insurance scandal is just the latest in a long list of cons perpetrated by bankers. What was particularly unedifying about this episode, were the fraudulent sales techniques employed by the banks to promote this line of business.

In many cases policies were sold to people who could never have claimed (e.g. entrepreneurs) and in an even greater number of instances policies were set up on behalf of customers automatically, without prior approval. Such actions were bad enough, but the manner in which the banks tried to defend themselves was even worse.

Lloyds have announced that they will not pursue an appeal concerning PPI, but this only can mean that they have truly exhausted all legal avenues. Remember that the British retail banks “won” the unfair charges battle on a technicality (that the Office of Fair Trading was not authorised to rule on said charges), not on the legitimacy of the charges. Continue reading

7th May An all too unsurprising crash in oil

Oil and other commodities crashed this week.

Oil dropped just over $20 a barrel. Looks like the bearish signal I picked up on a few weeks ago wasn’t misplaced!

On a more serious note this collapse in prices is proof that rampant speculation continues to distort markets. We wouldn’t see such a steep drop in such a short period of time were this not the case.

Such speculative activity is likely to be the defining influence of this decade. The opportunity for substantial financial reform was missed at the height of the Credit Crisis. I think we are all going to regret this.

As traders push prices up, this will fuel inflation and cause much suffering around the World. We are already seeing food riots in countries and I am sure that the struggle to survive has been a significant contributory factor to events unfolding in the Middle East.

Let’s see what happens with prices in the coming months, but I now fully expect the pullback in commodities to continue until a major technical level of support is reached and then traders will start to pile back in. Such trivialities as real demand or actual events will have little bearing on this process.

But what does that matter; after all it is only flashing numbers on the screen contributing to quarterly bonus payments isn’t it?


2nd May 2011 – The beginning of the end of the War on Terror?

So the Americans have finally got Bin Laden.

Looking beyond the hype, it looks to me like the US have been keeping a close eye on Bin Laden for a long time. I would not be at all surprised if we find out in future years, that they were just waiting for the right time to get him.

The action itself amounted to little more than an extra-judicial execution. So much has been done in the name of Liberty during the so-called War on Terror, which directly contrasts the ideal being supported.

However I have one hope from Bin Laden’s execution; the beginning of the end of the War on Terror.

In spite of all the media hype surrounding Bin Laden’s “leadership” of Al-Qaeda, it is surely clear that he was an extremely marginalised figure. If reports are to be believed he was holed up in a compound with two body-guards and no Internet connection. This hardly constituted an army of dedicated followers or an impregnable fortress.

A big problem with the so-called War on Terror has been the lack of a definitive enemy to defeat. The absence of such a body has made “winning” the War troublesome to say the least.

Bin Laden was clearly the media-inspired figure head for Al-Qaeda, but it is by no means certain he was involved in 9/11 or performing any sort of current, active operational role. Does Al-Qaeda really exist? Or is the whole “War” on Terror nothing more than a politically motivated fiction to offer the pretence of action by politicians?

Of course who knows what kind of loonies will be inspired by Bin Laden or America’s actions in the future, but for now it really is time to move on from the War on Terror. Its insidious potential for the corrosion of civil liberties and the rise of tyranny is really quite frightening, when I think about it seriously.

So let the USA revel in headlines about victory and how Bin Laden failed to beat America. The “victory” is in itself meaningless, but hopefully the consequences will see the resumption of liberal democracy.