Thursday, 3 September 2009

Denial - A Powerful Beast

I don't know how many times I have blogged on the subject of denial but it seems the theme just won't go away.

I have argued it can be a powerful mechanism used by successful business people to block out the negative issues and to focus on the positives which often is a trait of highly successful individuals. It is also, at the other extreme, the powerful force that allows psyochopaths to marginalise their crimes and live a normal life. It is the force that allows those who commit adultery under the noses of their spouses to act as if nothing is happening and even to turn the situation around and make out they are the victim not the cheated-on spouse. It is the power force that allows dictators like Col Gadaffi to welcome home convicted bombers as if they are national heroes while denying a shred of remorse for the victims of the crime. It is that powerful.

So here is a classic example of denial. In the wake of the credit crunch, the Government has urged banks to lend a great deal more to small businesses. There have been various intiatives to facilitate this, not least vast amounts of cheap loan support, Quantitative Easing (QE), underwriting of Toxic Debt, the Enterprise Loan Guarantee Scheme (ELG) and much more. Banks, meanwhile have consistently missed their lending targets, even those who are actually partially or mostly owned by us, the taxpayer. In fact, in the last quarter banks actually took back more than they lent out from businesses to the tune of over £4.5bn.

In the face of such actions, the banks claim that they are fearful of more bad debts, which may be natural. But when the ELG Scheme offers up to 75% of a loan to be guaranteed by the Government, why is so little credit being offered to small businesses?

In a classic case of denial (on many counts), Barbara Knight of the British Bankers' Association (BBA), which is a name to be played with if ever there was one, asserts with a straight face that 'demand for credit has dropped off'. It makes you wonder which planet she arrived from. She further supports the lack of regulation on bank compensation - in all aspects from salaries to guarantees, to golden hanshakes, to wholesale headhunting and extravagent bonuses linked to whatever they wish - for fear that the City will become uncompetitive and we will see top talent drain away to other centres with a more liberal view on earnings of such creatures.

This is denial at its worst or best, depending on which way you look at it. From a taxpayers point of view, the fact we have shelled out around £1.3trillion in capital, loans, guarantees and whatnot seems to have gone unnoticed. Further, our incredibly generous sums of money at rock bottom prices that we have lent to banks seems to be remaining in their strongholds when the precise purpose of our lavish philanthropy was to stimulate the economy by having all that glittering dosh used as credit to mainly small businesses.

Instead, we have banks who are not just holding onto our cheap cash but they are actually taking back more money from business - even consumers actually repaid some of the vast £1.5 trillion of collective debt for the first time since records began. In reality, banks have acted in exactly the opposite way we asked them to (and note I say asked them as there were no strings attached to the money we gave them, even for those banks we have a stake in - forward planning is not a strength of this Government, especially in a crisis).

Further, the banks have waved two fingers at us all and used most of the cash we gave them to actually invest more in the markets that failed us so badly last time around. And the bonus schemes are being tinkered with, the salaries are rising, the land-grab for 'talent' is occurring right in front of our faces at a pace that would make Usain Bolt cry.

In less than two weeks time we will have the anniversary of the fateful crash of Lehman Bros - which I read recently is what tipped us all into recession. Denial is a powerful beast because this did not trigger the recession just as sub-prime did not trigger the credit crunch - these were inevitable consequences of a fundamentally flawed financial system and they were merely manifestations of the underlying issues that everyone was systematically ignoring or denying.

Even intelligent economists as well as ministers were deluding themselves, and us, that we had never been better off and propects were at their best. The fuse was already burning, sub prime and Lehmans were merely the first of the firecracker-style explosions. They were not triggers in my analogies, they were the crisis exploding in our faces. The credit crunch was the next part of the explosion. Recession, in my mind, was going to happen anyway - it had to as the economies of the US and Britain were built on mortgage equity releases more than actual household incomes. For the first time in history, it was the perfect financial storm brewing and it was all there for everyone to see.

People like Barbara Knight, to my mind, are very dangerous. In her world, and those of the people she represents, it is perfectly acceptable to have a financial crash instigated by her members which helps drive unemployment toward 3m and to exacerbate the problem by not doing the core operation of any banking system which is lending to help stop it. In her world, it is far better to deny that her members had anything to do with it, make sure they are better looked after than before and deny that anyone is asking for credit.

In this case, along with the regulators and many of her members, many of whom advise our Government on a startegy that is patently failing, Barbara Knight needs to be replaced by people who have a sense of reality. The problems in our finacial system will not be recognised, let alone rectified, if people like Knight stay in her job. I am sure she is a very nice lady but in the grim reality of civvy street where the world looks very different, she would have lost her job for dramatic failure not as a consequence of dwindling profits - the same for the regulators and most of those whizz kid traders.

Many have written that there now exists two worlds - the real world in which we all actually live and try and survive in and that seen by a thin minority of financial people who are incredibly wealthy and believe that they are owed their extravagant living because of the essential work they do for the economy. They failed spectacularly - you cannot put it in any other terms as the scale of failure was so high that rich countries may be borrowing up to and beyond their GDP in order to pay for it in the near future, some countries went to the brink of bankruptcy. It means that all those profits that these people thought they were making were in fact made up - all of them and more were lost because they were never real.

All links to the fundamentals were lost and they violated the basic principles of a calculator let alone a financial system - the profits were only in their minds. Out there, in the real world, anyone with a modicum of intelligence could see that it was fundamentally and catastrophically flawed.

And now the remedy is failing by the actions of the same people who brought us down. We gave them more money than they lost and they cannot do the simple things we ask of them to help rescue the economy because they are too busy feathering their own nests again and justifying why the pursuit of incredibly high risk investments to produce imaginary profits to fuel their incredible bonuses is in fact the right thing to do for the good of us all - because if we didn't have such heroes, such Masters of the Univere (as Vince Cable calls them), we would be a sorry lot.

Well hello! The coffee's on and is smelling strongly, Ms. Knight. Some of the best talent in Britain, a whole generation of youth is languishing on the dole queue and we gave you every penny which saved your sorry skins. Now it's time to get a dose of reality - the world is very different to the one you see. The problem is, only when the Government drives those investment banker advisers out of their ears, stops pandering to the whims of incredibly wealthy people and stops appointing failed businessmen to key positons in the Lords and influential bodies, will we see some change.
But denial is a very powerful beast.

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