Many months ago I suggested that bank reform would not happen and neither would the stimulus withdrawal/exit strategy.
I don’t see any reason to alter my views.
FED rates are held at 0% – 0.25% . In japan the rate is held at 0.1%. The BoJ will also double its stimulus spending/printing. BoE has kept rates low and will, I think, be forced to resume QE later this year. Mark to market proposals in Congress will either get defeated – or it will be tin hat time.
Bank reform is everywhere but everywhere it is in retreat. Look at Senator Dodds proposals. A consumer protection body will be housed in the FED – surprise! – where the new body’s decisions will be overseen and vetoed by a committee made of representatives of the FED. Who represent and are staffed by the too-big-to-fail banks. So there goes one ball.
Clauses about being able to ‘urge’ the break up of too-big-to-fail banks are weakened even further by saying even this would only happen once it is ‘clear’ that there is an immanent systemic danger. And who will make this evaluation? It will be representatives from the FED, FDIC, SEC and other toothless, gurning, lick-spittles of the banks. Which should ensure that nothing will be done till the time for preemptive action is safely passed and there is no longer any chance of a wealthy friend having to accept a loss when a perfectly good public bail out can be arranged.
In short Dodd is the dud we all thought he was.
Over here in Europe things are no better. Germany and France would like the predatory, naked shorting of sovereign debt which is stalking various indebted countries, to stop. “Naked” selling of credit default swaps on sovereign debt is taking out insurance against the risk of sovereign default without holding the underlying asset. The point of naked shorting is that you can short (bet against) anything you want without ever having to go to the expense of investing in that asset.
Basically, naked shorting, is akin to a speculator taking out insurance on your house not burning down. Seems illogical but does also give the speculator an alarming interest in your house suddenly catching fire.
Ireland and the UK are both against any regulation despite being on the list of countries who will get shorted. The reason isn’t hard to find. Ireland is the domicile for a very large number of financial vehicles used to speculate. Most of the rest are in the UK.
Ireland, according to todays Irish Times, is also against suggestions, “designed to foster transparency in an opaque sector of the financial markets while curtailing excessive debt and pay.” Its the transparency not the pay restriction that worry Ireland. The reason is that most of the vehicles created and housed in Ireland for swaps, shorting and ‘insuring’ do not actually have much capital behind them. This is the ugly, open (to the financial world) secret Ireland wants kept from the public. Britain’s objections are similar.
Britain does not want tighter, or any, if we’re honest (which we rarely are) regulation of banks, hedge funds or finance generally. To give an example, according to a law suit now being heard in italy, the City of Milan is taking to court Deutsche Bank AG, JPMorgan Chase & Co., UBS AG and Hypo Real Estate Holding AG’s Depfa Bank Plc unit for fraud. This alleged fraud concerns the sale of derivatives to Milan city. I won’t go into the details but the suit claims the UK units!!! ( hence the UK’s objections) of all four banks sold derivatives which exposed the city to massive losses as a counter-party to the derivative trades.
London does not want this sort of thing exposed to scrutiny. So there goes the other ball.
London and Dublin also share another desperate need. They both need, as a matter of life and death, for their financial markets to be the power-house of their recovery. For they have nothing else. Nothing else will make Brown’s recovery plan work. He absolutely has to have massive growth and fast, and only another and larger financial bubble can hope to do this.
Slow organic growth will not work. The protected bank debts would pile up faster than normal, say – manufacturing growth, can deliver and the debts would bury us. As I think it will anyway. But that’s a different rant. Brown and Obama have painted us all into a corner where nothing, no matter what damage it does to others, and even potentially to the UK itself, can be allowed to imperil unfettered, unregulated financial growth.
Firstly, im a big fan of your elucidation here and on GU. Thanks for the enlightenment.
I have a question. You say toward the end of your post that Brown "absolutely has to have massive growth and fast, and only another and larger financial bubble can hope to do this."
I agree with this observation. my question is about boom and bust. Its about the long term picture. We are in the recession phase now but it would seem there is some belief (not least as you point out from those that need it most, politicians, governments and businesses) that rather than crash the whole global monetary system by re-inflating a bubble we will be lifted out of the current situation for a time, or at least till the bubble busts again.
Can this be pulled off for a period of time. I mean can there honestly be such a recovery and if there were is there some sort of timescale to how long it could last. 5years, 10 years, more?
Or is it more likely every goes bottom up – the collapse of the economic system – during this bust we are in right now?
Am i being too sensationalist in this last scenario?
Dylan,
can it be pulled off for a time? Yes, it has been. The rally in stocks has been and still is against all fundamentals. People who look at the fundamentals were convinced this was a sucker rally and thought it wouldn't last. It has and we were wrong. Others went with it and have made money. So bear this in mind when listening to anything I say.
I never thought governments would saddle their people with such debts. They apparently think the massive debts are either going to be paid off relatively quickly or they have decided public impoverishment is a 'price worth paying' in order to 'save' not banking but specifically the banks and bakers we have.
But your question is can it be sustained? This is THE question. The reason it has to be fast growth is because now we have all the uncanceled debts in the financial system (the cause of the crisis) and the longer they are around the more they cost. We also now have payments on the new sovereign debts we have taken on. And we will have even more costs to bail out more debts that are coming. All of this is much more than can be paid for by selling a few cars and planes.
Only financial and especially housing re-inflation can help us now. That is because bubbles can inflate as fast as you can fan the flames of avarice. AND as prices go back up then the negative equity itself disappears and many securities and other 'assets' will start to be 'worth' what the banks claim they are worth.
The question is will they appreciate and over what time scale? So far all the stimulus trillions has NOT inflated house prices. All it has done is inflate a stock rebound of modest proportions and various commodity speculations. If that's what a couple of Trillion buys then there just isn't enough money to do they job they need doing.
One way of looking at the effect of all this stimulus is to consider it as cash going to off-set the paper losses on debt backed assets. Seen this way Trillions printing and borrowing globally have failed to offset the deflationary effect of debt-backed asset destruction. Deflation is still outstripping even the insane inflationary tactics we are throwing at it.
My feeling is, we can and will continue to throw future tax income on hide and pretend efforts. But the cost of using public money to replace the cash flow which is NOT coming from assets – because despite their mark-to-model valuations, they are not bringing in any cash – is growing and will grow to the point where someone is not getting paid.
Unless those people can be persuaded for the greater banking good to accept the loss, then they will insist on payment, a margin call will not happen and BOOM. This plus the growing likelihood of some sovereign default perhaps caused by some restive population who just won't knuckle under, make me think that this will not last.
If they can re-inflate then we will go through another even bigger bubble. Sovereign debt might be considered such a bubble. AND then the debt will explode.
If no such bubble can be blown then the end is much sooner.
thanks for the response. I think the scenarios you lay out are accurate. I will be back around to comment again in the next few days