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Bookmark and ShareVeronika Thiel is a researcher and project manager on nef’s Access to Finance team.

A light at the end of a tunnel - or is it an oncoming train?

A light at the end of a tunnel - or is it an oncoming train?

Barclays is said to be already recovering from the credit crunch whilst most of its clients, and the population at large, still are not even seeing a sliver of the light that could indicate the end of the tunnel is in sight. Small businesses still face cuts in their existing overdraft and credit facilities despite of the fact that their businesses are structurally sound. People with consumer debt still face increased interest rates. Personal insolvencies, as a result of redundancies, are at an all time high (link to insolvency services). Mortgage holders see their interest rates rising. Banks reposess houses more quickly than ever, and debt collectors are also becoming more aggressive.

So what does this increase in banking profits actually mean? Are we seeing a rehabilitation of our broken financial system? Or are we simply on the way to returning to business as usual, with the toxic loans written off?

The simple answer is – no-one knows for sure. There was certainly a gradual return of confidence, meaning that people will want to invest again. But there remains also a certain amount of question marks. As Robert Peston from the BBC argues, banks are reducing the amount of money they lend, so that they simply have more on their books.

In addition, however, the way that banks post their profits can change quickly as they can use different methods of valuing their assets. Asset valuation is not an exact science, and there are various ways of doing so.

Be that as it may, everyone is sighing a breath of relief that at least two banks don’t appear to go the way of Northern Rock (although there are interesting ideas around to breathe new life into it. That relief could be (and in certain quarters, is) giving way to complacency and a return to BAUBAB: Business As Usual and Bonuses Are Back. Despite Barclay’s assurances that bonus payments are reformed, an average of bonus £100,000 for staff at Barclay’s Capital still makes me think that this is more cosmetic.

We probably will have to repeat this until we’re blue in the face – but banking reform has not gone anywhere near enough to create a stable financial system in which systemic crises such as the current one are less likely to happen. And anyone who thinks that the crisis is over forgets that for the millions of unemployed, and those steeped into debt, it’s only the beginning.

Bookmark and ShareVeronika Thiel is a researcher and project manager on nef’s Access to Finance team.

The Treasury Committee has published its last report on the banking crisis today, and it isn’t exactly diplomatic in its choice of words to describe the FSA’s failing and what needs to be done to prevent such a crisis from happening again.

The report says that the FSA failed ‘dreadfully’ in its banking supervision in the run-up to the crisis, and although there are apparent changes in the way it’s dealing with the market, the committee fears that these changes may just be a fad.

With that, they hit the nail on the head: it is to a certain extent quite fashionable now to talk about tighter regulation and letting banks not to grow too big. However, this rhetoric is rarely followed through with sufficient vigour. The Government, which is also heavily criticised in the report, should take the recommendations of the select committee to heart and act on them. They tie in nicely with our recommendations, so it’s well worth repeating them here:

– Separate retail and investment banking
– Ensure that no bank is too big to fail, or even too big to save
– Increase capital holding requirements for banks
– Don’t shy away from speaking out

The last point really must be emphasised. For too long, anyone who voiced criticism of the Finance-binge bonanza, be it a regulator, a banker, or a politician, was branded a spoil-sport and a doomsayer. I don’t want to excuse the FSA for its inactions and ineptitude, but even if it had taken a tougher stance, then it is quite likely that banking lobbyists and the Government would have told the regulators to back off. Hence the committee’s remark that the FSA must ‘develop the confidence to take unpopular decisions’ falls a bit short of the mark. The FSA must be given the authority and independence to be able to develop this confidence, to be able to be unpopular. Regulators aren’t there to make the banks all comfy. They are there to ensure the our money is safe. Let’s make sure that that’s not forgotten.

Bookmark and ShareVeronika Thiel is a researcher and project manager on nef’s Access to Finance team.

Remember to think happy thoughts!

Remember to think happy thoughts!

As promised yesterday a short summary of thoughts on the Government White Paper: Reforming the financial markets.

Unsurprisingly, but sadly, the bigger picture has been missed. There are many reforms that tweak the system here an there, but few that will change the overall picture. The paper isn’t really committing the Government to do too much whilst trying to give the impression that decisive action is being taken.

Most disappointingly, Darling will not move to break up the bigger banks, following the concept of: if it’s too big to fail, it’s too bit. Zero points for this.

The second biggest problem is the lack of immediate reforms. Many of the proposed measures will not be implemented immediately, giving the opposition (i.e. most of the financial industry) plenty of time to mount a counter-offensive. The City has one aim to restore business as usual and that bonuses are back (or BAUBAB as I like to shorten it). One journalist likened the current atmosphere in the City to the end of Terminator 2 – just when you think that that horrible robot has been smashed to smithereens, it is reassembling. It is thus crucial to work fast and seize the opportunity to reform the financial system in a meaningful way. Unfortunately, party politics and bickering defuse the potential of decisive and effective action that would reduce the influence of finance on UK politics and economy. It appears that no-one at the top of either banking or politics has understood that finance should be subservient to the needs of the economy, not the other way round.

Also zero points on the issue of bankers’ bonuses: Darling talks the talk, but certainly does not walk the walk. The short section on pay suggests to draw up a code of conduct buy February and banks will have to report on their compliance with this code yearly. However, there is no indication yet what will happen to the banks if they fail to adhere to the code. Basically, we’ll be none the wiser until then.

The paper scores slightly better on the issue of pre-funding. Basically, pre-funding would mean that banks have to pay a part of their money into a pot as insurance against their potential collapse. This pot of money would then be used to repay depositors. There are some obvious advantages to this: instead of the Government having to cough up vast amounts of money at a moment’s notice, there is already some earmarked for it. A bank collapse will still be unpleasant, but it will be slightly less painful. Also, from a behavioural point of view, a levy on banks would remind them regularly of the potential of failure. Banks are, unsurprisingly, against this levy, as it reduces the amount of money they can use to invest. In addition, they say it’s expensive and puts an additional burden on them when they are trying to get back on their feet (needless to say they fail to point out that they stumbled over their own feet in the first place). But there are other factors at play: banks, as we all have learnt over the past year, rely very strongly on trust. So banks have to be trust-worthy institutions in order to attract clients and make investments. That’s why individual banks cannot say that they will insure themselves against failure – that would be paramount to suggesting that they are not sure that their bank’s strategy is foolproof. Bankers might say that banks in general collapse once in a while, but they would not be able to concede this possibility for their own bank – investors would be scared away (I personally would trust a bank that was a bit more realistic and didn’t pretend it would know everything, and hence took out insurance against failure. But then, that’s just me….)

To get over this dilemma is simple – make it compulsory for every bank to have insurance. Of course, this may still tar the reputation of the whole of the banking sector a bit, as it indicates that banking collapses are not as rare as some would have you believe. That again could be a good thing: prudence is also required on the side of the consumer. So, if Darling really introduces this levy, that would be a step in the right direction.

There are also some great ideas on counter-cyclical measures: make sure that banks build capital in the good times to use them in the bad times. That kind of thinking is definitively the clever one, and if the regulations are strong enough to prevent banks from getting around them, then they will do more for financial stability than many other suggested measures. The question-marks are around the how and when – and especially the ‘when’ is urgent because of aforementioned efforts to reinstate the previous state of affairs.

If you want a digested read digested: we don’t know what will happen until it may be too late.

On that cheery note, I recommend you read some something relaxing now – such as our suggestions on five ways to well-being. Money, after all, isn’t everything.

Bookmark and ShareJosh Ryan-Collins is a researcher in the Connected Economies team at nef.


If anyone is wondering what people mean when they talk about a credit/banking bubble, this wonderful graphic produced by JP Morgan last week sums it up quite nicely. The blue bubbles show the major bank’s market valuation in Spring of 2007 when everything was still fairly hunky dory. The considerably smaller green bubbles (one might even call them dots in the case of Citi-group and a couple of others) show their market value now.

One wonders if there is a hint of irony in JP Morgan’s footnote: ‘while JP Morgan considers this data to be reliable, we cannot gaurantee its accurancy or completeness’.

Thanks for that JP.

Major Banks change in market capitalisation value, Second Quarter 2007 and January 2009

Bookmark and ShareVeronika Thiel is a researcher and project manager on nef’s Access to Finance team.

unbalanced-scalesWestern countries have long been accused of being glib about economic matters, and now we’re facing the consequences of our hubris. Our ceaseless insistence that our our economic system is stable and that everyone should aspire to copy us makes us look really stupid now in the eyes of the many other countries which did not or could not do what we did – live on credit.

Many transition economies and developing countries will suffer as a consequence of the credit crunch. In a globalised world in recession, globalised trade will suffer, and export-dependent countries will feel the pinch acutely.

So, in a way, I can’t blame the leaders of China and Russia for scolding the West. The greed and blind faith in funny money have caused most of the trouble. But there is another side of the story, namely that of the balance of trade. A balance of trade is the difference between the value of goods exported to one country, and the value of goods imported from the same country. So, if country A exports goods worth $100bn to country B, but only imports goods worth $40bn, then the balance of trade is positive for country A, as it exports more. For country B, on the other hand, the balance is negative. So, country B depends strongly on country A to provide it with the goods and services that country B cannot or does not produce. If country A stops producing these goods, then things don’t look good for country B. It will either have to go without, find another country where it can buy these goods from, possibly at a much higher price, or start producing the goods themselves – but that can’t be done overnight. Country A on the other hand is also interested in country B continuing to buy its goods. If they suddenly stop buying, then it has to find another market – but there might not be one, so its economy can also be hit by a sudden drop in exports.

So, overly skewed balances of trade are not good for either party. And this is where China’s remarks on America’s greed become interesting.

For the US, the balance of trade with China has long been negative, i.e. the US imported far more goods from there than it exported to China, as these figures on the balance of trade between the two countries show. In 2008, the US imported nearly 4 times more from China than it exported there. And we’re not talking peanuts. We’re talking goods imported from China to the tune of US$312bn, while the US only exported goods worth US$66bn. The US trade deficit: $246bn in 2008 alone. There is something ironic in the biggest capitalist economy on the globe relying so much on the last major surviving communist power player (both politically and economic) in the world.

In the olden days, this dependency was considered dangerous for the US. What if there was a revolution in China, or their economy collapsed, or their goods became more expensive? The US would suddenly be unable to rely on the cheap imports that helped sustain their economy over the last decade.

But as it turns out, it was the US economy that collapsed, leaving China exposed to massively reduced demand for its goods and services, resulting in a slow-down in production and economic growth (note that this of course also applies for all the goods and services China exports to the EU).

This is bad news for China, and their premier is right to be demanding more of a say in the world economy. On the other hand, I’m assuming that China realised that its dependency on exports may come to haunt it at some point, and that its growth was partially fuelled by the Western greed that Premier Wen Jiabao rightly blames for the mess we’re in.

But we all, including China, have to realise that we all massively benefitted from the cheap credit that allowed us to buy houses, holidays, and other stuff. Never mind it was always clear it would not last. Never mind it was always clear it was unsustainable. But most of us have profited one way or another from it. I’m all for finger-pointing and blaming myself, but only as long as we remember that our credit bubble also was responsible for much of the economic boom we saw in many countries – growth that is now leaking out of the cracked bubble like gas from a leaky balloon. I don’t think that a player the size of China can pretend not to have realised that this is a bubble and will end sooner or later. Otherwise, they were just as blind to it as our Western economic soothsayers. And that would be really scary.

P.S.: The same argument goes for Russia, by the way- but there is only so much space in a blog.

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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.