Well, it has been some time since I updated this blog and many of the things that were predicted have finally occurred. However, the speed of it all has certainly been surprising. When I wrote some months ago that the virtuous circle which had fed global growth in the last few years could easily turn into a vicious one, I had no idea of the scale of this viciousness. The extent to which wealth has been destroyed is vast- pity those poor pensioners in defined contribution systems! Today, Bear Stearns, Lehman, Merrill, AIG, Fortis, Dexia, Hypo Real Estate, Washington Mutual, Wachovia, Alliance & Leicester, Bardford & Bingley, Morgan Stanley and Goldman Sachs have either disappeared or been transformed. Expect more consolidation.
Some commentators argue that there has been a complete “market failure”; I would argue exactly the opposite. There has been a clear and blatant “failure of regulation”, especially in the US, where politicians have interfered with the Federal Reserve and Government Sponsored Entities in order to pursue a lax monetary policy which would statistically noteworthy but unsustainable GDP growth data and, ultimately, votes. One only has to review past press articles on FNMA and FNMC to note how politicians took measures so that these institutions would provide access to credit to all segments of the population; including those who, it turns out, were not creditworthy.
In those jurisdictions where central bankers, in their supervisory role, were really independent, the scale of the shock has been much smaller. In Spain, for example, the central bank did not allow local players to use off balance-sheet SPVs to fund credit in order to engage in capital and liquidity arbitrage. Why? Because it was pretty obvious that this was exactly what these vehicles were engaged in. The creation of a parallel banking system was not permitted. As a result, Spanish banks have serious credit issues arising from their real estate portfolio but they have not experienced the pain of some of their foreign brethren. Some cajas or mutual savings banks, however, given their limited ability to raise capital and, in some instances, political interference, are likely to fare much worse than the banks.
Other commentators have mentioned diminishing competition as a concern, given the level of concentration in some markets- in my opinion, this is a minor issue. Sure, the UK clearers are consolidating but note that one of the consolidators is Spanish. It’s really about time that European countries got their act together and encouraged cross-border mergers. I would hazard that we will see more of these in the coming 5-10 years and eventually see a pan-European competitive arena.
Ultimately, however, there is still impending doom in the form of inflation. Globalisation has allowed developed economies to import deflation from low cost countries while pursuing an expansive monetary policy, but now that emerging markets are exporting inflation, it is only a question of time before it feeds into developed markets. I can only imagine that an expansive monetary policy combined with rising inflation will have serious implications on the value of money. Most people remember the 1929 US stock market crash as the aftermath of the Roaring 20s, but events in the Weimar Republic had an even more significant impact. Let’s hope we don’t end up like Germany in the 30s.
And on that happy note, hope you are all having a swimmingly good time...