Wednesday, 9 September 2009

Lightening Can Strike Twice

It is very unsusual that anyone agrees with me, even my wife, so imagine my surpise when I read that no lesser sage than former Federal Reserve boss, Alan Greenspan, goes on TV to agree with me.

Ok, so he didn't actually mention my name but he all but did. He was interviewed by the BBC for some series and he said, and I quote, 'The crisis will happen again but it will be different.' See, I told you so. Those eagle-eyed readers will know that I have repeatedly, not once only, said that the way we have dealt with this crisis has only papered over the cracks and so it will recur. Now two experienced individuals have publicly agreed with as I number Joseph Stiglitz, Nobel Laureate as another. He, again, rather strangely omitted my name in his announcements but the gist was the same.

Pedants among you will note that Greenspan is observing dryly that economic crashes come after prolonged periods of growth - and that is inevitable. That is not quite what I said - in fact, I said something very different but, heck, the result was the same. Greenspan even goes onto to say that sub-prime may have triggered the current crisis but it could have been any other of the weaknesses in the system that could have brought it on. In a roundabout way this again agrees with my personal thesis and I suspect for the same reasons this time. Sub-prime was just a manifestation of a flawed system. I think that's what Greenspan is saying and he probably nicked the idea from me.

Reading the article more thoroughly reveals that his opinions are pretty different and frankly, that's because he knows what he's talking about whereas I am guessing. However, it wasn't a bad guess - take note, Gordon, that plumb job as CEO of UK Financial Investments is up for grabs and I think anyone who gets even half of what Greenspan thought of right needs to be considered seriously particularly if there are nice bonuses associated with the job, old chum. Greenspan goes on to say that he thinks regulation should focus on fraud and capital requirements at banks to get them back on track.

To be honest, the sentiments are echoed by a real banker. I said banker, actually. Stephen Green, Chairman of HSBC, who has just levied a £25 per month on my HSBC Bank Account without warning and for no apparent reason, has actually come out and admitted what Adair Turner was barking on about the other day was right. Turner was two steps closer to the Funny Farm when he suggested that many of investment banks' activities 'served no social purpose' and Green may have saved him from the padded cell by agreeing. Further Green says that 'excessive' bonuses should be stopped too. I bet he got some nasty stares from his whizz kid traders when he got into the office today.

What Greenspan and Green are saying is that banks need to focus more on their core activities and make sure their basic fundamentals are right. In a much less reasoned way, I have said the same to anyone who would listen. Green says that 'Some parts of our industry have become overblown, and certain products and services failed the tests of usefulness, suitability and transparency'.

I think what Green is saying fits in with Turner's assessment. My personal take was that I think many products that banks traded so excessively in the last 10 years have been out of touch with any reality and I would assert that the profits made came out of thin air. Quite literally, taking one of these products as collateral to a restaurant to the pay the bill would be no better than me offering my lottery ticket to the waiter and saying this £1 ticket is for payment and you can have whatever it is worth as payment for the meal. The waiter would have a reasonable chance the ticket is worth £10 but a 1 in 14m chance it was worth a jackpot, plus all the probabalities in between. But the highest likely option would be that the ticket was not worth anything. Imagine the waiter taking that ticket and it being traded many times and each time the people who traded take some real money from the other party in return of a chance of a jackpot. Pretty soon, the ticket will have been traded so many times that whatever it is worth will never pay for the price paid. The trades have nothinbg to do with the ticket's worth.

It may be a bad example but it is not far off the truth. Some of the products the City trades serve no earthly purpose other than to line the people's pockets who trade them.

So I would stick my neck on the line and say to Greenspan, 'Actually, Alan, you are wrong. The crisis we saw did not come as an inevitable consequence of a prolonged period of prosperity, it came as a result of the vast increase in trading of spectulative products that had lost all touch with their origin and so were generating virtual, not real profits.'

I would further assert, that until we ban such products being traded, we will endure another cycle of fictional prosperity and spectacular bust bigger than before - unless we change the system fundamentally. It isn't about regulation and it isn't about capital reserves - it's about what banks trade. Sort that out and we get of that problem until they invent the next scam to make money. And one last note on this for all those virtual reality merchants in the City - the talent they so loyally protect, who they believe should have the freedom to earn as much as they like, have been trading only make-believe products. Frankly, any kid could have done it who had played Monopoly.

It's some day when you realise all the tripe you have written actually is getting close to the truth. Greenspan and Green, I salute you.

No comments: